With land becoming scarce, tenants relocate farther east.

THE Inland Empire remained one of the hottest industrial markets in Southern California in the first quarter as vacancy rates fell and overall sales and leasing activity kept climbing.

Industrial vacancies were 6.6 percent in the first quarter, down from 6.9 percent in the previous three months and 7,9 percent in the year -go first quarter.

Sales and leasing activity rose to 8.5 million square feet in the January-to-March period from 8 million square feet in the fourth quarter and 6.3 million in the first quarter of 2003, according to Grubb & Ellis Co.

Jeff Smith, vice president at the Ontario division of Lee & Associates, said demand in the industrial market shows no signs of slowing. Meanwhile, supply in the popular 400,000-square-foot to 500,000-square-foot market has decreased after the close of several large deals in the first quarter.

"It's left us with a fairly limited supply of large buildings--existing (sites) for sure, and then when you talk about planned sites it's even more so," he said.

Among the leases Smith referenced was Wal-Mart Foods, the food distribution arm of Wal Mart Stores Inc., which took 750,000 square feet in Fontana off the 10 Freeway. Black and Decker also took 560,000 square feet in Rialto. Majestic Realty Co. inked a 1 million-square-foot lease with logistics company National Distribution Centers in Chino. Smith will also be closing a 600,000-squarefoot lease for Leap Frog Enterprises North American distribution center.

There are only a handful of new projects of substantial size near Ontario International Airport that are deliverable in the foreseeable future, Smith said. On top of that, there is a dwindling supply of land.

"The few sites that are left are controlled by corporate users, end users that are slated for future expansions," Smith said.

A 40-acre piece of property along the 15 Freeway owned by Cardinal Health Inc. illustrates the situation. The health care company is selling the property and interested buyers are thought to be ready to spend $8.25 per foot. While it's A-plus property next to a freeway, Smith said the price is out of whack with the last year's prices of $4.50 to $5.50 per foot.

"Those are numbers that are consistent with Corona and bordering on Orange County, not the Inland Empire," he said.

This means that businesses will keep moving east, creating a new market designation: Inland Empire East, which includes Redlands, Moreno Valley, Perils and Riverside.

"We're experiencing what I'm sure a lot of other markets are experiencing, which is rapid run-up of sale prices, and cap rates are going in the opposite direction," said Frank Geraci, senior vice president for CB Richard Ellis. "There's just unbridled enthusiasm from money sources and developers."

Geraci said the Inland Empire, which once thrived with spillover industrial development from Los Angeles, is now seeing the emergence of healthy retail and office markets.

"We have enough rooftops and enough companies out here already," Geraci said, "and because of the fact that a lot of the worker bees live out here they're opening up not only back offices but also headquarters."

Scott Kaplan, senior managing director of the Inland Empire for CB Richard Ellis, said expansion of the 15 Freeway and housing starts in the area have fueled an uptick in retail development, with development of some contemporary shopping centers.

"The collar of the Inland Empire is really changing from blue to white and you see that in the pricing of the homes," he said.

Kaplan said the region is changing with growth, and so is its reputation. Developments such as Forest City's Victoria Gardens, a 1.3 million-square-foot mixed-use development, are encouraging that transformation, he said.

In all, Kaplan said, there is between 8 million and 10 million square feet of development planned and under construction within 20 miles of his Ontario office. That should be plenty to maintain the region's torrid leasing and sales activity for another three years.

Major Events:

* Wal-Mart Foods, the food distribution arm of Wal-Mart Stores, leased 750,000 square feet in F0ntana off the 10 Freeway.

* Black and Decker leased 560,000 square feet in Rialto.

* Landlord Majestic Realty Co. inked a 1 million-square-foot lease with logistics company National Distribution Centers in Chino.

* Leap Frog Enterprises is about to close on a lease for a 600,000-square-foot building for its North American distribution center.

* Cardinal Health Inc. wants to sell its property, and interested buyers may be ready to spend $8.25 per square foot.

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