Inland Empire Posts State's Lowest Vacancy

The vacancy rate stood at 10.4% at the end of the quarter, down from 13.1% a year ago and 13.7% in the first quarter of this year, the Grubb & Ellis statistics show. The office market "picked up where it left off in the first quarter," according to the report, which said that more than 400,000 sf of new space was under construction at midyear. Overall activity remained solid in the Inland Empire market, which is composed of Riverside and San Bernardino counties and includes 16.2 million sf of office space.

The survey reported more than 330,000 sf of absorption for the quarter, citing "a healthy pre-leasing trend" for space under construction, with half of the buildings landing commitments for the upcoming space. Year to date, 949,171 sf of office space has been absorbed, up from 359,723 sf for the same six-month period last year.

Inland Empire leasing activity during the second quarter was steady across the board, but it was the investment sales sector that stood out, according to Mary Sullivan, Ontario-based California client services manager for Grubb & Ellis. She notes that the second-quarter deals in the Inland Empire market included two of the largest investment transactions ever recorded in the market. In May, the Temecula-based Garrett Group purchased a seven-building portfolio for about $73.3 million. Also in the second quarter, Hall Equities expanded its office portfolio by acquiring four of Arden Realty's trophy properties, totaling more than 346,000 sf, at a price of $43.5 million.

One indicator that has enticed investors to the Inland Empire has been the increasing asking rates, highlighted by a fifth consecutive quarter of hikes. The class A rate rose from an average of $1.77 per sf to $1.78 per sf followed by a class B rate rise from $1.33 per sf to $1.36 per sf. Another attraction for investors is the Inland Empire's historically low class A vacancy rate, which currently stands at 8%.

The second-quarter survey cites Corona's commercial market as one of the best examples of the increasing activity in office development, with approximately 100,000 sf under construction and more than 50% of it pre-leased.

The Grubb & Ellis report forecasts long term growth for the Inland Empire office market, "albeit not at the record-breaking levels of the last few years," it says. It cites the predicted slowing of job growth, increasing worker's compensation costs and the looming state budget crisis as factors that will keep the market from performing at the levels of the past few years.