MARKET HIGHLIGHT, MARCH 2006

INLAND INSIGHT
Brad Umansky, Bill Roblero and Michael Daley

Like a young teenager with an insatiable appetite, the Inland Empire is all about growth. Cheaper available land and a booming population are big factors in this expansion trend.

Retail

San Bernardino and Riverside counties enter 2006 with significant retail strength that has carried over from 2005. Development can be seen throughout the entire Inland Empire region that now is home to more than 3.8 million people. With an unemployment rate of 4.3 percent, growth exceeding 20,000 jobs per year, improving per capita personal incomes and double-digit retail sales growth, the Inland Empire remains a hot spot for regional and national retailers. More than 15 million square feet of retail space are planned in this two-county region.

One of the many projects under construction is Transcan Development's 750,000-square-foot Canyon Crossings, located in Riverside at the intersection of Interstate 215 and State Highway 60. The center will include a Wal-Mart Supercenter, LA Fitness, Wickes Furniture and John's Incredible Pizza. The $42 million development demonstrates the significant improvement of the eastern Riverside County/Moreno Valley trade area during the past 2 years.

Lewis Retail Centers continues its leadership as the largest developer of retail space in the Inland Empire market with more than 10 major retail projects in the pipeline, including the 372,000-square-foot High Desert Gateway in Hesperia and the 477,000-square-foot Apple Valley Commons in Apple Valley. Both projects are Target-anchored and should break ground in 2006 or early 2007. Lewis is also continuing its Sierra Lakes projects along the newly constructed 210 Freeway in North Fontana. The Home Depot, Ralphs, Walgreens and Costco are just a few of the tenants moving into this dynamic location.

In Corona, Memphis, Tennessee-based Poag & McEwen Lifestyle Centers will be opening its 575,000-square-foot The Shops at Dos Lagos Lifestyle Village featuring tenants such as Williams Sonoma, Pottery Barn, Ann Taylor, Coldwater Creek, P.F. Chang's China Bistro and The Cheesecake Factory. Dos Lagos follows the October 2004 opening of the 1 million-square-foot Victoria Gardens in Rancho Cucamonga. Both projects are indicative of the “upscaling” of the Inland Empire as more and more executive housing develops throughout the region.

Despite the significant amount of new retail coming on line, vacancy continues to remain low at approximately 6 percent, and lease rates continue to climb. Lease rates for shop space in excess of $24 per square foot are now common for most neighborhood centers. Small strip centers anchored by Starbucks Coffee tend to have average lease rates in excess of $30 per square foot. Anchor space is leasing for between $14 to $20 per square foot.

The Inland Empire's investment market had a very strong year in 2005 with more than $1 billion of retail investment property changing hands, compared to $1.2 billion in 2004 and $950 million in 2003. Most of the capital acquiring retail centers in the market continues to be private capital coming out of Los Angeles and Orange counties. An exception to this fact was Inland Western Retail Real Estate Trust's $51.5 million acquisition of The Commons at Temecula, a 293,000-square-foot promotional center adjacent to Temecula's regional mall, The Promenade in Temecula.

Cap rates also declined throughout the year. Cap rates for single-tenant properties and high-quality retail centers traded below 6 percent for most of the year. Strip centers exceeding 10 years in age generally traded for cap rates between 6 and 6.5 percent. The median price per square foot climbed to $211 per square foot compared to $141 per square foot only 2 years ago. From a cap rate perspective, the beginning of 2006 has shown strong signs that the best of times are now behind us. Cap rates are mildly creeping up from their mid-2005 lows as investors are willing to either keep their cash in the bank or deploy their assets outside of the Southern California market.

The fact that Inland Empire's population is expected to grow by more than 1 million people in the next 15 years along with job growth that is on a 20-year winning streak makes the outlook bright for continued retail demand the rest of the year and beyond.

— Brad Umansky is a senior vice president for Sperry Van Ness in Ontario, California.

Multifamily

Multifamily construction is at a 10-year high for the western part of both Riverside and San Bernardino counties in California's Inland Empire area. Population growth in the Inland Empire is one of the strongest nationwide, with Riverside County's 15 percent growth since 2000 making it the fastest growing population of the 172 MSAs in the United States. In addition, with the area's high barriers to entry and strong housing demands, absorption rates are expected to stay strong.

Up 5.2 percent from January 2005, asking rents continue to rise in class A, B and C properties in the western Inland Empire submarkets of Rancho Cucamonga, Ontario and Corona. Rent growth in the cities of eastern San Bernardino and Riverside counties, including the High Desert area, came in higher at 7.2 percent in 2005. Overall, occupancy rose 45 basis points to 96.3 percent in 2005. In addition, rising home values are pricing out multifamily residents from homeownership.

Riverside, Rancho Cucamonga, Ontario, Corona and Temecula are the top picks for active apartment investors and developers as well as out-of-county residents relocating to the area. Also, more development activity is occurring in the High Desert area, specifically Barstow and Victorville.

New multifamily construction has focused on high-end product. However, as of late 2005, more market-rate product was coming online and planned for this year as rent on a per-square-foot basis continues to rise. There's been a significant rise of speculators in the market since condo conversions in San Diego County and parts of Los Angeles County have slowed. Housing affordability continues to be the underlying factor in attracting buyers from all over Southern California.

The median cap rate was 5.9 percent. Average pricing per unit on transactions of 50 units or more was $118,181 and the median sale price was $13.2 million. Total sales volume was nearly $891 million, and average building size was 130 units.

Sacramento, California-based Panattoni Development will break ground in early 2006 on Piemonte at Ontario Center, an urban, mixed-use village to include 806 residential units. In Upland, Colonies at Crossroads, a 434-acre master-planned community, will also include a residential component. New apartment construction includes three developments exceeding 700 units. The Lewis Group of Companies is developing the Homecoming at Eastvale in Mira Loma, and Sares-Regis Group has started on Piemonte Apartments in Ontario. Emerald Brook is delivering the 810-unit Spanish Walk in Palm Desert.

— Bill Roblero is a senior associate for Lee & Associates' Apartment Services Group in Ontario, California.

Industrial

The movie line “build it and they will come” rings true for the Inland Empire industrial sector, the fastest growing industrial market in the United States for the past 3 years.

There were more than 23 million square feet of industrial lease and sale transactions signed in 2005, with most of the new development projects selling out before completion. The bustling Inland Empire market continues to attract both small and large businesses from all over the world for distribution purposes as well as families due to the growing job and affordable housing markets.

The Inland Empire's net absorption during fourth quarter 2005 was 4 million square feet, which brought the total net absorption for the past 12 months to 15.2 million square feet. The 3.6 percent vacancy rate is low for an area that has witnessed an additional 5.1 million square feet of industrial space. The market will remain healthy this year with competitive rental rates and sale prices, as well as continuous growth and demand, even with a current construction boom taking place and 8.7 million square feet of industrial product expected to come on line during 2006.

Big box continues to be the dominant product type throughout the Inland Empire. With the more western submarkets of the Inland Empire, such as the Ontario Airport area, nearly built out, developers are heading eastbound towards San Bernardino and Redlands, where much of the big box development is currently taking place.  

The Inland Empire's robust growth is largely due to its close proximity to not only Los Angeles County but also the ports of Long Beach and Los Angeles. The ports of Long Beach and Los Angeles experience 58 percent of all international exports coming into the entire United States, the majority of which come from India, China and Taiwan. Last year alone, these ports received 14 million TEUs (20-foot-long cargo container units). In addition to the Inland Empire's close proximity to Los Angeles and the ports, the region is also in close proximity to major railways, highways and the Ontario Airport, spurring foreign investors to flock to the Inland Empire as a way of connecting shipping and distribution operations.

One of the largest projects taking place in the Inland Empire is Hillwood's project in San Bernardino, AllianceCalifornia. Located on the former 2,165-acre Norton Air Force Base, the master-planned, big box development currently houses distribution facilities for Mattel with 1.2 million square feet of industrial space; Pep Boys with a 600,000-square-foot distribution facility; and Kohl's with a 540,000-square-foot distribution center. Stater Bros. is targeting AllianceCalifornia with plans for a new build-to-suit corporate headquarters on a 150-acre site. Moving its current headquarters from Colton to the Inland Empire is evident of the growing trend of companies relocating to the booming region for distribution purposes.

Two substantial lease transactions were signed on two separate buildings located only 1.5 miles apart in San Bernardino — Pactiv's $14.6 million, 7-year lease of a 587,000-square-foot distribution facility and Ashley Furniture's $13 million, 5-year lease of a 683,269-square-foot industrial building owned by ProLogis.

Major players in the industrial development market in the Inland Empire include Prologis, Majestic Realty, Ridge Realty, Wattson Land Company, Lennar, AMB Realty, The Alter Group, IDI and IDS. Most of the tenants in the Inland Empire are Fortune 100 companies. The single largest owner/user is Wal-Mart, with more than 4.3 million square feet in Mira Loma and Ontario.

— Michael Daley is a senior vice president in Colliers Seeley International's Ontario Office.

Office

Grubb & Ellis' 2006 Real Estate Forecast says to expect an aggressive introduction of new office product to the Inland Empire this year. Due to the area's limited inventory of new available space, developers will build across the market. Lured by the soaring residential population, Orange County companies have established more prominent office locations in the Inland Empire. According to Grubb & Ellis' report, this contributed to a 38 percent increase in office absorption in 2005 over the prior year and a year-end vacancy rate of 7.4 percent (2.1 percentage points down from 2004).

Once limited to the Inland Empire hubs of Ontario and Riverside, new office construction this year will grow in square footage while also growing to newer submarkets like Redlands, San Bernardino and Rancho Cucamonga, according to Grubb & Ellis. This activity will amount to a 64 percent increase in construction levels. Worries of building too much, too fast are tempered by Grubb & Ellis' assertion that the Inland Empire market is still underserved in terms of office space. In 2004, Orange County had 44.1 square feet of office space per job, and Los Angeles County had 39 square feet per job. In contrast, the Inland Empire office market could muster only 15.3 feet per job.

According to the Inland Empire Economic Partnership (IEEP), the number of companies working with the organization in 2005 jumped by 20 percent over the previous year. Paul Hiller, CEO of IEEP, attributes the rising interest in the market to its less expensive real estate and the existing clusters of industries that rely on a large pool of highly skilled workers.

Jack Kyser, chief economist for the Los Angeles Economic Development Corporation, predicts that the Inland Empire will add 25,200 jobs in 2006, surpassing 2005 by 2,000 jobs, according to the IEEP report.

©2006 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.