WESTERN SNAPSHOT, AUGUST 2010

The Inland Empire industrial Market

The Inland Empire market improved significantly in the second quarter. Cities across the two-county area have been awakened from their slumber by maturing leases at older market rents, which are substantially higher than current rates, causing tenants to consider availability and the reconfiguring of space by downsizing or consolidation to achieve savings.

Absorption improved materially from the first quarter, which registered a negative performance of more than 2.7 million square feet, to the second quarter, which posted a negative absorption of only 216,248 square feet. Both sales and leasing have picked up as users both small and large are seeking to take advantage of the perfect storm of buying opportunity: low prices, low rents and low interest rates. Users and buyers of smaller buildngs are seeing SBA rates at all-time lows in the mid-5 percent range, giving them the ability through 90 percent loans to get close to comparable pre-tax rental rates and achieve substantial savings when loan amortization is taken into account on buildings that have taken the market adjustment on prices.

This has also reverberated to larger buildings where sales typically don’t occur to user-buyers. One such example is the first-quarter CBRE Investors sale to Kohl’s of an approximately 970,000 square-foot San Bernardino warehouse at a price rumored to be less than $45 per square foot. Given depressed interest rates for publicly traded debt and LIBOR-rate borrowers, as well as recent accounting reporting changes, sales are occurring on buildings exceeding 200,000 square feet to user-buyers.

The more interesting component in the market is the investor-class sales. There has been a lot of capital formation with no home for the expected wall of maturing debt. Unfortunately, the property has not flowed forth with either the velocity or price to satisfy the funds looking for it. As a result of this, there have been multiple offers from all-cash buyers for institutional-class, big box industrial product. These buyers are bidding cap rates prevalent in the 2006-2007 timeframe on buildings either without over-market rents or with long horizons on lease expirations.

There are many players chasing these deals.Firms like KTR are ahead of the curve and getting their share, and others such as Hillwood, JP Morgan, Alere Property Group, Blackridge Real Estate Group and CT Realty  are vying for the limited opportunities. The current 1.6 million-square-foot portfolio of Mira Loma distribution centers featuring Ingram Micro and Ferguson Enterprises as tenants and a vacant 239,000-square-foot building reportedly has more than 16 offers.

This has even translated to vacant buildings getting multiple offers in hopes of appreciation back to replacement cost. CBRE Investors’ recently offered two remaining buildings, totaling close to 1.4 million square feet, at its Cajon project in San Bernardino, which is rumored to be under contract to the winning bidder, CT Realty. 

With much of the downside sucked out of the market, the typical buy-low participants are viewing upside as substantially outweighing downside risk. Despite loan leverage being low for all but SBA borrowers, there appear to be plenty of all-cash, alternative-yield seekers and low-leverage buyers who see it and get it.

— Paul Earnhart is a senior vice president in Lee & Associates’ Ontario, California, office.

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