Strong industrial activity buoys market in office sector.

WITH heavy demand for industrial space in a market that is fully occupied in many pockets, the Inland Empire closed the July-September period with more than 15 million square feet of space under construction.

The demand for warehouse, distribution and industrial property has helped buoy the office market, driving the vacancy rate down to 9.2 percent from 10 percent in the prior quarter, according to Grubb & Ellis Co.

Of the six Inland Empire submarkets, all but one saw declining vacancy rates. That submarket, which is near Ontario International Airport, had a vacancy rate of 8 percent from 7.3 percent in the previous three months. More is on the way: The submarket has about 637,000 square feet under construction.

That's a substantial chunk of the nearly 1.6 million square feet of office space under construction in the third quarter, an increase of 500,000 feet from the previous period. "Historically, the area around the airport enjoyed all the benefits or growth ... now a greater stretch of the Inland Empire is participating in further economic development, be it housing, retail, jobs, office, commercial space," said Chuck Belden, senior director in Cushman & Wakefield Inc.'s Ontario office.

The Inland Empire also saw a slight uptick in asking rent for office space: For Class-A, $1.85 (up 1 cent), and for Class-B, up 3 cents ($1.51).

While Class-A rents in the South County submarket dipped to $2.21 per square foot last quarter from $2.25 in the previous three months, Class-A office rent in that area has climbed more than 15 percent since the year-ago period.

"If there's no major economic reversal, we see rents continuing to go up," said Taylor Ing, senior director at CB Richard Ellis Inc. "It's going to have to, because the construction costs are rising so rapidly. For anybody to break ground, the rent has to be higher than what we're getting today."

In one of the Inland Empire's major office lease transactions last quarter, Anaheim-based Fremont Investment and Loan signed a five-year lease for 40,000 square feet in Ontario. Fremont is slated to move into its new space in January. While the office market outlook is positive, the third quarter ended with few big deals announced in the region.

"There's good activity in the marketplace, but in terms of large transactions I think we'll see that occur more the fourth quarter," said Belden. "It's just a matter of timing."

Industrial strength

The Inland Empire remains a hotbed for industrial space this year and continued to offer more rentable industrial square footage, 291.3 million, than any other region in Los Angeles.

The vacancy rate among the area's industrial space fell again to 4.2 percent from 5.6 percent during the April-June period and 6.6 percent for the like period a year earlier. However, sales and leasing activity was down about 1 million square feet to just over 7 million at the end of the quarter.

Belden said that while corporations consider opening new facilities outside Southern California, like Phoenix or Las Vegas, the Inland Empire's central location often wins out.

"Thirty to 40 percent of (a company's) immediate market is within an hour of their distribution center here," he said. "It makes sense to be here. There's available land, labor and transportation."

Third quarter industrial market highlights included Crocker Logistics taking 256,275 square feet in Rancho Cucamonga for 48 months.

On average, a square foot of industrial space in the Inland Empire rents for 38 cents. In Montclair/Upland, it is 59 cents and industrial space in San Bernardino goes for 46 per foot per month, Not surprisingly, the Colton/Rialto submarket, which averaged about 35 cents per square toot last quarter, also had the Inland Empire's lowest industrial vacancy: 0.06 percent, tumbling from 2.7 percent in the second quarter.

Roger Rhoades, a senior vice president in Grubb & Ellis' industrial services group, said that while the area is lacking in large pieces of available land it is ripe with opportunities for smaller projects.

"Rialto has very little large-box development opportunities. Most of the larger pieces have been acquired," he said. "So that opens the door for smaller developers to come in and build smaller buildings, and there is some market for that."

In areas like Riverside, Chino and Rancho Cucamonga, the purchase market for smaller-sized industrial space is booming, with prices as high as $126 per square foot.

"The 5,000- to 10,000- to 12,000-square-foot buildings have just taken off like gang-busters," said Rhoades. "The debt service on these buildings with 20 percent down is substantially less than what the true market rent is. So why would you not buy?"

Major Events:

* Crocker Logistics, based in Rancho Cucamonga, inked a deal to lease 256,275 square feet on Buffalo Avenue.

* Vineland, N.J.-based National Distribution Centers entered into a short-term lease for 385,000 square feet in Chino.

* Liquid Container signed a five-year lease for 100,000 square feet in Rancho Cucamonga.

* Newark Group leased just over 115,000 square feet in Ontario for 10 years.

* Anaheim-based Fremont Investment and Loan expanded into the Inland Empire, signing a five-year lease for 40,000 square feet of office space in Ontario.

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