MARKET HIGHLIGHT, MARCH 2005

INFLUX IN THE INLAND EMPIRE
Scott Kaplan

The Inland Empire, comprising Riverside and San Bernardino counties, encompasses more than 27,000 square miles. The region continues to be a hot spot for population, housing and job growth in the state of California. While housing prices in the rest of California are high, the Inland Empire continues to be one of the most affordable areas in the state, which fuels the increasing migration of individuals as well as companies from surrounding counties.

Retail

The Inland Empire retail sector is composed of 82.6 million square feet of space, of which, 5.2 million square feet (6.3 percent) is currently vacant. In fourth quarter 2004, the entire market experienced 334,546 square feet of positive net absorption. Of the demand in the Inland Empire, the East End submarket showed the majority of absorption for the third quarter in a row. There is continued interest in community centers, which represented 154,033 square feet of positive net absorption. The retail market exhibited an extraordinary 1.9 million square feet of year-to-date positive net absorption.

The average asking NNN retail lease rates ranged from $1.28 to $1.43 per square foot. Among the five major submarkets for the Inland Empire, the High Desert submarket had the lowest average asking lease rate at $0.94 per square foot, while the Low Desert area recorded the highest rate of $1.84 per square foot. Of the center types, unanchored strip centers continued to demonstrate the lowest average asking rate of $0.98, whereas power centers maintained the highest rate at $1.81 per square foot.

Nearly 252,000 square feet of community/neighborhood center space came on line in Highland and Corona in fourth quarter 2004, resulting in the completion of two developments — the 266,000-square-foot Hidden Valley Plaza in the latter and the 72,716-square-foot The Village at East Highlands in Highland. The two centers boast tenants such as Kohl’s, Stater Bros. and Vons. Some major tenants that completed construction in the Inland Empire during the fourth quarter were REI at Victoria Gateway, Edwards Cinemas at Crossings at Corona and Sears Grand at Foothill Crossing. 

The lifestyle town center Victoria Gardens had its long-awaited grand opening in October 2004 in Rancho Cucamonga, with major tenants including Robinsons-May, JC Penney and Macy’s. Victoria Gardens is for many high-end retailers the first foray into the Inland Empire market as residents demand more upscale tenants. Victoria Gardens is now home to Abercrombie & Fitch, Banana Republic, Bebe, Pottery Barn and Williams-Sonoma. These retailers are opening with strong sales numbers, due in large part to a migration of an abundance of white-collar workers with disposable incomes who are tired of driving to neighboring Orange and Los Angeles counties to shop.

As these retailers continue to do well, the market will begin to see more and more corporate brands moving in. The planned Shoppes at Chino Hills and Dos Lagos in Corona will continue delivering high-end tenants in 2006. In the Coachella Valley, The Gardens at El Paseo now boasts tenants such as Ann Taylor, Pottery Barn and Saks Fifth Avenue. In the city of Riverside, The Galleria at Tyler, a 1.1 million-square-foot super regional mall, has experienced extraordinary sales growth and is making expansion plans to add 145,000 square feet of contemporary outdoor “street-style” shopping space, including dining and entertainment venues, and a 2,950-seat theatre. The $75 million project is scheduled for completion in spring 2006.

The Inland Empire currently has 12.8 million square feet of retail space under construction and another 17.3 million planned for the next few years. In the next year, Oklahoma-based furniture retailer Mathis Bros. plans to develop a $27 million, 370,000-square-foot retail outlet on a 14.6-acre site in the Ontario Center, making it one of the largest furniture outlets in Southern California and the only California location for Mathis Bros.

Office

The Inland Empire office market comprises approximately 17.7 million square feet of space. The Inland Empire has readily available and affordable land, which contributes to reasonably priced housing as well as commercial real estate. Housing sales are expected to remain strong in the coming year even with increasing interest rates. The Inland Empire also includes a ready-made and highly technical workforce with five major research universities in the area, including the University of California, Riverside. These competitive advantages continue to attract many migrating companies, making the Inland Empire one of the fastest growing markets in the United States.

Another 304,396 square feet of positive net absorption occurred in fourth quarter 2004, up from third quarter’s 85,414 square feet. The addition brings the year-to-date total to 633,536 square feet of positive net absorption of office space. The Inland Empire east submarket experienced a positive 196,165 square feet of net absorption, while the Inland Empire west submarket had 108,231 square feet of positive net absorption. All of these numbers confirm that the Inland Empire office market remains strong.

In fourth quarter 2004, the average asking full-service gross lease rate for the entire Inland Empire office market increased from $1.69 to $1.70 per square foot. This lease rate is a product of the Inland Empire’s eastern submarket rate of $1.66 and the Inland Empire western submarket rate of $1.84. The Class A office product reported a rent of $1.79 per square foot, while Class C reported average rents of $1.36 per square foot. Cities exhibiting the highest lease rates included Ontario with an average of $1.96 per square foot and Corona with an average of $1.95 per square foot. The office vacancy rate declined another 1.5 percentage points in the fourth quarter to 10.87 percent. A total of 308,902 square feet was developed in the quarter.

Seven office buildings comprised the 308,902 square feet of fourth quarter office completions, including the 42,612-square-foot Fairway Business Centre at Milliken in Rancho Cucamonga and the 91,277-square-foot Vanderbilt Plaza in San Bernardino. Riverside boasts the largest base of office space in the Inland Empire. Approximately 2 million square feet of Class A office space is planned for the city of Riverside, 90 percent of which will be spec product. Some recent Class A office developments include Hunter Park, Riverwalk and Sycamore Canyon.

Ontario is active with nearly 2.4 million square feet of office development planned, proposed or underway, two thirds of which is Class A office space. Targeting the small owner-user market, RMS Empire Development LLC of Beverly Hills announced plans to build Empire Office Center, a single-phase project that includes five speculative one- and two-story office buildings ranging in size from 6,400 square feet to 11,800 square feet, located at 3595 E. Inland Empire Blvd.

Industrial

The Inland Empire commercial real estate market has not felt the sluggishness in the economy due to its many competitive advantages. Many companies are migrating to the Inland Empire due to affordable housing, lower operating costs as compared to other Southern California locations, a highly skilled and educated work force and the most sophisticated transportation infrastructure in the country. Manufacturers and distributors can choose from 4,038 buildings totaling more than 289 million square feet of industrial product, and the majority of this is new construction and reasonably priced.

The industrial market exhibited continued demand in fourth quarter 2004, resulting in more than 6.2 million square feet of positive net absorption, while 13.4 million square feet of new industrial product were added to the market. The Inland Empire also experienced more than 9.4 million square feet of gross lease and sales activity, bringing the year-to-date total to 32.5 million square feet.

Average asking manufacturing and warehouse lease rates remained unchanged at $0.35 per square foot, with a range of $0.34 per square foot to $0.44 per square foot in the fourth quarter. The eastern Inland Empire led the region with an average asking lease rate of $0.37 per square foot, while the western part of the market stood at $0.35 per square foot.

The Inland Empire’s industrial vacancy rate decreased slightly to 2.22 percent, and the availability rate also lowered to 7.31 percent. The western submarket’s vacancy decreased to 2.06 percent, while the eastern area posted a vacancy rate increase to 2.60 percent in the fourth quarter.

A total of 61 buildings comprising 5.9 million square feet finished development in the Inland Empire during fourth quarter 2004. Industrial buildings are in demand as seen by the 189 buildings, totaling 13.4 million square feet, still in the construction phase.

More than 1 million square feet of industrial product is planned for the city of Riverside alone in 2005, where local power rates are up to 25 percent lower than most other Inland Empire utilities as a result of the city’s economic development electrical rate program. The Prologis Park I-210 in Rialto finished construction of two buildings — a 543,300-square-foot facility leased to Black & Decker and the largest speculative warehouse in the market at 880,000 square feet. In the city of Riverside, a 412,522-square-foot building on Box Spring Boulevard also finished construction; 209,573 square feet of the facility is currently available.

Multifamily

During 2004, the good news kept coming for the Inland Empire apartment market, which comprises 302 apartment communities totaling 71,486 units. With job growth continuing at a relatively healthy pace, multifamily demand again surpassed the market’s modest completion volume. As a result, occupancy approached a very healthy 97 percent for most product types except for newer construction, which displayed modest softness due to the appetite for new for-sale housing amongst prospective tenants. Rents sustained strong upward momentum.

The Inland Empire’s expanding job base kept total housing demand high. Helped by skyrocketing single-family home prices, apartment demand proved to be solid. The area absorbed 558 apartment units during 2004. The Foothill area and Riverside/Corona, which added most of the area’s new supply during the past year, didn’t appear to have any trouble absorbing the additional product.

Riverside-San Bernardino’s December occupancy of 96.2 percent was just a tick below the national highs seen in neighboring Los Angeles and San Diego. The newer stock in Riverside/Corona, with an occupancy rate of 90.2 percent, was the only submarket anywhere in the area not registering essentially full occupancy levels. (This will change in the near term as a number of condominium conversions are expected to reduce the area’s rental stock.)

Leading the area in rent growth were the outer Riverside/San Bernardino county areas, which reported an upturn of 9.6 percent. Rent hikes ranged from 5.3 to 7.6 percent across the Coachella Valley, East San Bernardino County, the Foothill Area and Riverside/Corona. The growth brought average rental rates in the Inland Empire to $969 per month or $1.14 per square foot.

The Inland Empire is about to receive its biggest wave of new apartment completions since the early 1990s. Total ongoing construction is expected to jump to more than 5,400 units. Properties scheduled to be completed during 2005 contain 4,607 apartments, up 2.7 percent from 2004 and 48.1 percent from 2003.

With the economy proceeding to grow at a significant pace and the existing stock already essentially full, product availability should be the key factor shaping the Inland Empire’s near-term demand capacity. Thus, absorption during 2005 is expected to virtually mirror new supply at 3,600 units.

Scott Kaplan is the senior managing director in CB Richard Ellis’ Ontario, California, office.

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