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January 17, 2017

Commercial real estate in the Inland Empire: Lease rates up, vacancies down

Richard K. De Atley

San Bernardino County Sun

The Inland-area commercial building vacancy rate fell 21.6 percent in the fourth quarter of 2016 compared to the same time in 2015 and the monthly average lease rate jumped 15.2 percent over the year - but remains below those of surrounding areas.

The fourth-quarter bare-bones lease rate for the Inland area was 53 cents a square foot, lower than the averages for the Los Angeles, Orange County and San Diego markets at 79 cents, 76 cents and $1.03, respectively, according to an analysis by commercial real estate firm Kidder Mathews.

The vacancy rate stood at 4.6 percent in 2016, down from 5.4 percent the previous year.

The vacancy equates to 22.3 million square feet of available industrial space, "down from the 25 million square feet that was vacant a year ago, which is amazing considering that 17.9 million square feet of space was delivered during that time period," the Kidder Mathews report said.

Net absorption, which takes into account vacated and newly constructed available space as well as occupancy at the beginning of the quarter, was a positive 20.4 million square feet, marking 17 straight quarters on the plus side, for 80.8 million square feet.

The report noted that what it defines as the east submarket for the Inland area including Riverside, San Bernardino, Redlands, Moreno Valley, Corona, Banning and Beaumont added more than 15.3 million square feet of occupied space in 2016, "which accounted for the lion"s share of the positive absorption in the Inland Empire over the year."

The east area now has slightly more than 238 million square feet of commercial building space. The west area - which includes Chino, Ontario, Upland and Fontana - has the most for the Inland area, at 252.8 million square feet.

As noted in previous reports, Kidder Mathews analyst Jerry Holdner said many of the industrial spaces were entering the market unpriced, with landlords letting the market set the rate. Holdner said the practice started in 2013, as the market emerged from an initially anemic post-Great Recession recovery.

"It has been going ever since, and in fact has doubled in size since 2000," Holdner said in a phone interview. Commercial real estate for the Inland area now stands at 510.8 million square feet, he said.

The report noted that leasing activity was down during the fourth quarter, but that was due to limited supply. The 4.7 million square feet that came off the market during the fourth quarter was the slowest since the second quarter of 2013.

"Currently there"s 19.4 million square feet under construction, most of which is over 500,000 square feet. As this new inventory comes to market, so should a rise in leasing activity," the report said.

The report cited underway projects including the Crossroads Logistics Center in Beaumont at 1.49 million square feet; the Duke Perris Logistics Center in Perris at 1.24 million square feet; the Citrus Commerce Center in Fontana at just over 1 million square feet; and the 1-million-square-foot Meridian Business Park in Riverside.

"The market is becoming increasingly robust, as pricing continues to trend upward while vacancy and availabilities remain at historically low levels," the analysis said.

The Inland area remains attractive for its lower rent and for the size of the warehouses and distribution centers available, Holdner said.

"People are hard-pressed to find a big warehouse in Los Angeles or Orange County. If you want big, that"s going to be in the Inland Empire," Holdner said.

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