The Inland Empire industrial market continued its torrid pace in the fourth quarter, as developers barely kept up with growing demand for warehouse and distribution facilities.

The market absorbed 4.3 million square feet during the October-December period, bringing total absorption in 2004 to 21.1 million square feet, according to Grubb & Ellis Co.

At year end, industrial space under construction totaled 14.1 million square feet in a market with 296.8 million square feet of existing space.

The industrial vacancy rate in the Inland Empire hovered at 4.4 percent, slackening slightly from the third quarter's 4.2 percent.

In Ontario, with one-third of the submarket's available industrial space, the vacancy rate was 2.9 percent in the fourth quarter. Even tighter were the smaller submarkets of Moreno Valley/Perris and Montclair/Upland, each with 1.8 percent vacant.

Vacancies are expected to remain low, despite a virtual doubling in land values over the past year and rising rental prices, said Mark Latimer, senior vice president with CB Richard Ellis in Diamond Bar.

"The Inland Empire is really one of the only submarkets regionally that has newer, state-of-the-art, large blocks of warehouse distribution space available," he said. "And it's still the lowest-cost alternative for distribution space regionally by anywhere from 15 to 40 percent."

The average asking rent for a square foot of industrial space in the Inland Empire was 36 cents in the fourth quarter, down 2 cents from the previous three months. By comparison, the average rent for Los Angeles County industrial space was 51 cents.

Land for large industrial buildings is running out in the western part of Inland Empire, which includes Chino, Fontana, Ontario, and Rancho Cucamonga, with construction of larger industrial space shifting east to areas including Corona, Rialto, Riverside and San Bernardino.

"We're virtually out of land in Inland Empire west," said Latimer. "Inland Empire east is really the place for growth because it's got available land. The bulk of new speculative development in excess of 100,000 square feet is in Inland Empire east."

More than 1 million square feet of new industrial space became available in the Colton/Rialto submarket last quarter, which now has more than 7.5 million square feet of industrial space. The area's vacancy rate spiked in the fourth quarter to 13.7 percent, highest in the area, but that number was inflated from completion of the 882,230-square-foot Building 1 of Prologis' I-210 Park, according to Grubb & Ellis.

The Redlands/San Bernardino region ended the quarter with nearly 1.2 million industrial square feet in the pipeline, more than triple the amount of industrial space it had under construction during the July-September period.

Office growth

Meanwhile, the much smaller office market is showing rapid growth.

The year ended with nearly 2 million square feet of new office space under construction, up from just under 1.6 million at Sept. 30. The vacancy rate nosed upward to 9.5 percent from 9.2 percent in the July-September period.

"The uptick in activity of new space has just been dynamic. It's just been red-hot," said Mary Sullivan, director of national client services with Grubb & Ellis.

Sullivan warned that so much construction could at least temporarily overcrowd the market.

"To date the pre-leasing has been very good," she said. "But if that trend slows down even a little bit and then they hit at the same time, then there could be a narrow window there when things are a little bit more flat than people might like to see."

The average asking rent for Class-A office space fell by 1 cent in the fourth quarter, to $1.84 per square foot. Class-B asking rents increased by 3 cents sequentially to $1.54 per square foot.

Riverside, which had the most active Inland Empire office market throughout 2004, has more than 5.6 million square feet of office space in 212 buildings. The area, which will have another 546,000 square feet available once current construction is completed, saw its office vacancy right dip nearly 2 points to 7.5 percent during the fourth quarter.

Nearly 133,000 square feet of Riverside office space became newly occupied in the fourth quarter, making up a good chunk of the 439,680 square feet absorbed in the entire Inland Empire.

Sullivan said new Riverside office construction is spreading from the core downtown to less-populated areas of the city.

"Whenever you're dealing with an established downtown, there are definitely other considerations" such as parking, she said. "If you build a little bit on the periphery to still pull from downtown it's probably better planned, and that's what's happening."

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