WESTERN SNAPSHOT, JUNE 2007

Inland Empire Industrial Market

Galvin

There are only a handful of big distribution markets in the country that have the necessary mix of logistics infrastructure, capable labor pool and the raw land necessary to meet the growing warehousing needs of large international firms and institutional investors. Nationwide, the three largest distribution markets — the Inland Empire, Atlanta and Chicago — accounted for roughly one third of all industrial construction activity in the United States for 2006. At the beginning of 2007, the Inland Empire has more industrial space under construction than Atlanta and Chicago combined, proving that the up-and-coming Inland Empire is quickly positioning itself as the nation’s premier big distribution market and America’s gateway to trade in the Pacific.

Since 2000, improvements in logistics technology, increased global trade, widespread acceptance of intermodal transportation standards and improvements in supply chain management have led to record demand for high-tech warehouses and distribution centers. The biggest users of warehouse space are third-party logistics providers, large international shipping firms and large companies with private warehousing. In order for these firms to achieve economies of scale, decrease shipment cost and time, as well as increase customer service levels, they need newer and more efficient buildings in a port market. Such buildings need to be of concrete tilt-up construction, have a 30-foot minimum clearance height, large yards with plenty of maneuverable space for trucks, ESFR sprinkler systems and need to be very large — typically 400,000 square feet or more.

It is this last building requirement that has been the most troubling for developers and investors in the Inland Empire. As space grows scarce and land prices rise in the more desirable western part of the market, more and more companies are looking east and even north as the industrial landscape of the Inland Empire continues to evolve. At the beginning of second quarter 2007, a total of 23.9 million square feet is under construction in the eastern Inland Empire, representing 85 percent of construction activity occurring in the entire market. This same time last year, there were 16.7 million square feet under construction in the eastern Inland Empire, representing only 70 percent of construction activity in the market.

San Bernardino, Riverside and Redlands, all in the eastern Inland Empire, are the most active submarkets in terms of completions and construction activity for 2006. Planned projects, which have not yet broken ground, total 40.7 million square feet in the eastern Inland Empire as opposed to only 13.5 million square feet in the western part of the market. It is interesting to note that Victorville to the north amounts to 6 million square feet of planned space and Beaumont, which is in the far eastern portion of the Inland Empire, totals almost 3 million square feet of planned space. The willingness of developers and investors to venture to these outer limits of the Inland Empire underscores the incredible demand for large scale warehouses and distribution centers.

At the start of 2007, the market’s existing inventory of industrial space stood at 338 million square feet. New supply in 2006 for the Inland Empire tallied an astounding 21.7 million square feet, representing a 6.4 percent expansion in the industrial inventory base for the market. For this same period of time, absorption totaled more than 15 million square feet. This might seem surprising, except for the fact that roughly a third of all newly constructed space was leased before construction ended, with almost 10 percent of the large warehouse space being pre-leased before construction even started.

2007 is looking to be another stellar year for the Inland Empire with 7.2 million square feet of new construction completed, 27.8 million square feet currently under construction and 54.2 million square feet planned at the beginning of the second quarter. Even with so much new product becoming available and so much more still under construction, it is not enough to meet the current demand. The direct vacancy rate stood at 5.2 percent and the average asking lease rates for all industrial space increased by 7 percent to $0.45 per square foot per month.

The major developers and investment firms in the Inland Empire have not changed much over the years. Hillwood Development, Majestic Realty, Panattoni Development, Sares Regis, RREEF, Bixby Land Company and industrial REITS such as ProLogis and AMB continue to finance and develop a majority of the large warehouses and distribution centers in the Inland Empire. A relatively recent addition includes the Alere Property Group which, since its inception in 2003, has established itself as a major developer and investor in the Inland Empire industrial market.

According to CoStar, industrial investment sales for the Inland Empire in 2006 totaled $858 million and 189 transactions. This is a 45 percent increase over industrial investment sales for 2005, which totaled $590 million and only 128 transactions. Major investment sale transactions that occurred at the start of this year include the sale of the Ontario Ridge Commerce Center, an 854,000-square-foot industrial complex that sold for $73.4 million or almost $86 a square foot. Another major transaction involved a two-building, 352,000-square-foot portfolio in Mira Loma. Lincoln Property Company purchased these two buildings for a total of $28.6 million or $81 per square foot.

Recent lease transactions include a 1.1 million-square-foot lease by Galleria Furniture at the Sierra Business Park in Fontana, a 500,000-square-foot lease by Ryder Logistics at the California Commerce Center in Ontario and a 331,000-square-foot lease by DSC Logistics in the Rancho Cucamonga Distribution Center.

Thomas Galvin is a research associate in Colliers International’s Ontario, California, office.


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.