Development activity slows as land values outpace rent rates - Real Estate Quarterly—Inland Empire - Industry Overview

The Inland Empire's industrial market tightened in the fourth quarter as vacancies dropped and new construction slowed.

A 1 million-square-foot increase in sales and leasing activity helped lower, the vacancy rate to 7.8 percent, from 7.9 percent in the third quarter, according to Grubb & Ellis Co.

But the amount of new space developed fell to 7.6 million square feet during the fourth quarter from 8.6 million square feet in the third quarter and 9.3 million square feet in the fourth quarter of 2001.

"It was relatively slow the last six months' said Trent Wylde, regional director of industrial leasing for Majestic Realty Co. "You can't develop property because the rates are flat but land prices continue to be inflated."

Leasing rates held steady at 25 cents to 33 cents per square foot per month. (They generally include a tenant improvement allowance from the landlord on new space.) That's still a bargain compared to rates in the rest of Los Angeles County, where rates ranged from 43 cents to 64 cents.

Most Inland Empire transactions were for buildings smaller than 200,000 square feet as tenants continued to be cautious about making large, long-term investments.

Still, the quarter was not without a couple of major transactions, the largest by Cushman & Wakefield of California Inc., representing tenant P&O Nedlloyd Logistics.

The logistics company paid an unspecified amount in December for a 10-year lease of a 433,487-square-foot distribution facility in the Chino South Business Park at 6725 Kimball Ave. in Chino.

Another company, USF Logistics Inc. agreed to a month-to-month sublease of 100,000 square feet of warehouse space for $31,500 per month in the Philadelphia Distribution Center at 11600 Philadelphia Ave. in Mira Loma in November.

But brokers said low interest rates were enticing more companies to buy warehouse and distribution space instead of leasing.

Boyd Furniture Manufacturing signed a one-year lease with an option to purchase a 318,104-square-foot warehouse building in the Fontana Distribution Center at 7551 Cherry Ave. in Fontana in December. The sale of the building for $9.2 million is expected this quarter.

"(Buyers') monthly debt service is substantially lower than market lease rates," said Craig Yocum, an industrial broker with Delmar Commercial Real Estate Services.

Few port effects

One source of fourth quarter worry for owners and operators of warehouse properties is now but a distant memory: the 10-day shutdown of the Ports of Los Angeles and Long Beach that halted shipments destined for the area's warehouses and created a backlog of products offshore.

The work stoppage ultimately had a minimal effect on cargo flow to the warehouses--only a dozen or so steamships diverted their goods to other ports--though the labor unrest contributed to an uncertain atmosphere for companies considering expansion plans.

"It's one less additional concern out of the way," said Jeff Smith, senior vice president of industrial leasing and sales at Lee & Associates Ontario Inc. "But the only thing that's going to pick up business is going be the national economy making a turnaround."

The office sector, a less significant real estate market in the Inland Empire, saw vacancy rates rise to 12.4 percent, from 11.9 percent in the third quarter.

The vacancy rate likely will not begin to decline until the summer because there was 227,203 square feet of new space under construction in the last quarter, up from 189,057 square feet in the third quarter.

But unlike most parts of Southern California, landlords are confident the new product will be needed because there is a lot of older, dilapidated space that new tenants are not looking for, brokers said.

The region continues to draw people in search of affordable housing and with that comes a lot of professional services companies--the legal and homebuilding industries in particular--looking for office space.

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RELATED ARTICLE: Major Events:

* P&O Nedlloyd Logistics paid an unspecified amount to lease a 433,487-square-foot distribution facility in the Chino South Business Park at 6725 Kimball Ave. in Chino for 10 years.

* Universal Packaging Systems Inc. signed a 5-year, $2.6 million lease on 115,000 square feet of warehouse space in the Spectrum Monte Vista Business Park in Chino.

* Inland Truss Inc. bought a 172,000-square-foot industrial building for $5.9 million in the Agua Mansa Industrial Center at 1755 Brown Ave.

* USF Logistics signed a month-to-month sublease at $31,500 per month on 100,000 square feet of warehouse space in the Philadelphia Distribution Center at 11600 Philadelphia Ave. in Mira Loma.