WESTERN SNAPSHOT, NOVEMBER 2009

Inland Empire Office Market

1. MARKET MOVES

Regency Tower

Although developers have put a moratorium on future speculative groundbreakings until the market recovers, Regency Tower, Silagi Development’s 260,000-square-foot mid-rise building in downtown Riverside, California, will be completed this month. Purchased by the Riverside County District Attorney’s office in December 2008, the 10-story building is currently the largest office development in the area and is within walking distance of downtown Riverside’s courthouse. Such expansion illustrates the needed growth for certain tenant profiles to properly serve the market’s population of 2 million people.

Also, many medical-related tenants are currently shopping the market for space once occupied by finance-related companies that were adversely affected by the sub-prime lending industry.

2. MARKET MEASURE

Although a market contraction is ongoing, the rate appears to be slowing. Year-to-date negative absorption stands at 64,149 square feet. This is a welcome reprieve from the negative 422,317 square feet recorded in the first 9 months of 2008. If this trend continues into the first half of 2010, it will be safe to say that the office market has bottomed out, which will help stabilize the vacancy rate. Less negative absorption and the chance for positive figures will also indicate that existing market tenants have completed their consolidation efforts. This will allow the leasing activity of expanding tenants — government, attorneys, for-profit educators and medical-related practices — to be more pronounced and felt.

In the investment arena, the number of distressed properties is set to rampantly increase in the months ahead as payment becomes due on lingering notes. As distressed properties are taken back by the banks as REOs, the sales activity on foreclosed properties will increase in 2010, providing sound opportunities for investors and owner-users. To date, short-sale activity has picked up. There is $63 million in distressed office assets.

3. THE MARK OF A MARKET

The Inland Empire bears the risks and rewards of being an emerging office market. On the one hand, the two-county area’s population currently stands at 4.2 million residents, up from 3.3 million in 2000. Such growth created a gap between the residential populace and the number of office firms available to serve this base, prompting developers to build 8.6 million square feet of new office space since 2004. On the other hand, the local office base is a diminutive 27.5 million square feet and, with the recent national recession, its vacancy rate has been very volatile. Simply put, too much product built too soon has created some growing pains for landlords. This has been an opportunity for new tenants to enter the marketplace and for existing tenants to renew, right-size or expand their operations.

The long-term outlook, however, is very promising. Rental rates are more attractive compared with Orange and Los Angeles counties, and companies will need to have a local market presence to support the Inland Empire’s currently underserved population growth once an economic recovery does occur. Positioned in Southern California’s path of growth, the Inland Empire is centrally located and has the population, workforce, affordable housing, industrial base, proximity to Los Angeles’ ports, the transportation infrastructure and an ample supply of available land for future development.

— John Daciolas and John Ewart are senior vice presidents in Grubb & Ellis’ Office Group, and Mano Leventakis is executive vice president and managing director of the firm’s Inland Empire operations.

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