Although the Inland Empire industrial market is facing another quarter of a slowing economy, it continues to prove its ability to combat downward economic pressures through stable gross activity and increased net absorption.
The Inland Empire saw more than 5 million square feet of activity in the third quarter, up just more than 2 million square feet from the second quarter. Some notable transactions of the quarter include the 749,309-square-foot lease signed by MGA Entertainment Inc., the manufacturer of Bratz Dolls, in Redlands, as well as the 480,340-square-foot lease signed by Kohler Co. in the city of San Bernardino. Each of these transactions are examples of companies looking to locate their businesses in the Inland Empire East submarket while having the ability to find a build-ing large enough to consolidate all operations.
The Inland Empire saw a modest increase in the total availability rate this quarter, primarily due to new construction of speculative buildings. Second quarter’s rate of 12.8% increased by 5.5% to 13.6%, or 3.5 million square feet.
With the exception of buildings that began construction, or were in the pipeline to start construction before the economic downturn, developers have halted many of the highly anticipated planned projects.
Office Market
The recent financial upheaval on Wall Street has caused businesses to take the “wait and see” approach in their real estate decisions.
On a local level, the Inland Empire’s sluggish economy has caused many companies to decrease payrolls, constrict budgets or contract space requirements, while a few companies have evaporated completely. The timing of this slowdown coupled with the large amount of new construction, 1.2 million square feet in the third quarter alone, has led to decreased demand with a continuing increase of supply.
In response to the local and national economy, the Inland Empire office market has transformed. The balance of market power has shifted toward the tenants. They are reaping the benefits of multiple prime location options, additional concessions and tenant-friendly lease terms, which translate to higher tenant-improvement allowances, discounted lease rates and free rent, resulting in lower effective rates.
The market conditions have led to a stable level of leasing activity in the third quarter. Businesses that once occupied class C space are upgrading into class A or B space at comparable rates, as evidenced by the negative 75,711 square feet of absorption in class C buildings.
High-quality buildings saw absorption of 69,084 square feet, while 41,802 square feet of absorption was recorded for class B space. The leasing activity in the Inland Empire in the third quarter was highlighted by the 49,005-square-foot CUDL/CCUL lease transaction at the newly constructed Ontario Airport Towers I, the 31,887-square-foot Wachovia Corp. lease transaction at Empire Corporate Plaza in Rancho Cucamonga and the 23,324-square-foot Brady Corp. relocation from Pomona to Waterside Center in Ontario.
With no new major construction starts this quarter, office construction in the Inland Empire will start to slow as the current developments are completed. As these projects are delivered to the market, vacancy levels will increase; however, the marketplace will continue to create opportunities for progressive tenants that would like to take advantage of the abundant leasing opportunities.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
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