Warehouse construction shifts focus from speculation in face of tight money market.

Warehouse construction shifts focus from speculation in face of tight money market

With more than a fifth of the Inland Empire's industrial real estate sitting empty, development of speculative warehouses in the once-booming market has ground to a halt.

Developers said they are turning to developing built-to-suit industrial projects and retail centers.

There is only 800,000 square feet of speculative industrial space currently under construction in Riverside and San Bernardino counties, one-tenth of the 8.1 million under construction the same time last year, according to Robert Bach, regional research director for Grubb & Ellis real estate brokerage.

At the same time, there was a boom of retail development, with 16 shopping centers over 40,000 square feet under construction, according to Grubb & Ellis figures.

The Inland Empire has a total of 116 million square feet of industrial real estate, much of it built over the last several years, said Mary Sullivan, research specialist in the Inland Empire office of Grubb & Ellis.

Vacancies have skyrocketed to 21.2 percent because of the abundance of new product on the market as well as the fact that financially strapped companies are dumping second generation space back on the market as they downsize. Sullivan said.

"We will not built a speculative (industrial) building right now, just because you can't make money doing it," said Bill Shubin, manager of the western region of Prentiss Properties Ltd. Inc., a Dallas-based development, investment, property management company which owned 250 acres of land in the Fontana Commerce Center.

In 1989, Prentiss had plans, and in fact had building permits, to build a 200,000-square-foot industrial building but was wary about the amount of product coming on the market and backed away from the project, Shubin said.

"We're glad we didn't (build the project), because rental rates have continued to fall," Shubin said.

So instead of developing their own property, these days Prentiss is selling property to the other companies, such as the Big Five Sporting Goods Division of Thrifty Corp., which are developing their own projects, Shubin said.

Prentiss Properties has also been involved in bidding for some built-to-suit projects for companies that have come to the Inland Empire and have special needs in space, Shubin said. Built-to-suit "is a pretty active part of the market right now," he said.

The California Commerce Centers, which is composed of 3,400 acres around Ontario Airport, has built an average of 2.5 million square feet of industrial space a year since 1983, said David Ariss, managing director of the Centers. The business park is now composed of 10 million square feet of space, the vast majority of it industrial space.

But, for the first time in years, there is no new space under construction, Ariss said. Because of the high industrial vacancy rate, banks won't finance industrial projects, he noted.

In the last six months, industrial leasing prices have fallen to 22 to 25 cents a square foot from 27 to 32 cents, Ariss said.

The next big project planned for the California Commerce Center is a 1.3- to 1.6-million-square-foot retail center featuring brand-name stores selling items at bargain prices, said Ariss.

The mall, to be called The Mills, will feature well-known retailers selling items at bargain prices, said Norman Priest, community economic development director for the city of Ontario. The project will be built by Western Development Corp., a Washington D.C.-based developer of similar projects in Chicago and Philadelphia.

The Ontario redevelopment agency will kick in a $28 million subsidy for the $200 million dollar project which the city will pay out over a number of years, Priest said.

The mall, which will be composed of eight anchor tenants, is scheduled to open in 1994. It is projected to generate $400 million of annual sales and 4,000 new jobs, Priest said.

However, the developer has not yet obtained financing for the project, he said. Western is "firming up commitments" with anchor tenants. Most financial institutions require that projects are pre-leased before construction loans are granted, Priest explained.

Ariss predicted that industrial development will start up again, soon. "We'll be absorbed by this time next year," he said. "There's a huge demand. We had a lot of developers who overbuilt, but our inventories are dropping."

Last year was a record one for both the amount of space built in the Inland Empire and the amount of space leased, Sullivan said. Industrial developers built 14.6 million square feet of space and companies leased out 11 million square feet, she said.

In the Inland Empire, industrial real estate is virtually the entire commercial real estate market, explained Dave Knapper, general manager of Bishop Hawk, a Rancho Cucamonga-based commercial real estate brokerage. The industrial market has a base of 116 million square feet as compared to a 12 million square foot office market, Knapper said.

"You're looking at probably the largest warehouse distribution center, not only in California but in the Western United States," Knapper said. In recent years, Los Angeles and other Southern California companies have turned to the Inland Empire for their storage and distribution needs, he said.

"We have the space available. It's bigger. It's cheaper. It's newer," he said. Compared to Los Angeles industrial real estate prices, leases in the Inland Empire are 5 to 12 cents a square foot cheaper and industrial land purchases are $10 to $15 a square foot cheaper, Knapper said.

PHOTO : Commercial space: Building shifts