Vacancy levels in the Inland Empire's industrial market fell again last quarter as demand for warehouse and distribution space stayed strong.

With another 4.4 million square feet taken off the market, the vacancy rate tumbled to 2.7 percent during the second quarter, from 3.6 percent during the January-March period, according to Grubb & Ellis Co.

The strong demand in the 304-million-square-foot market pushed up average asking rents for a square foot of industrial space one penny, to 37 cents, with rent in nearly every submarket climbing or at least staying steady.

The increased demand for quality inventory and a lack of available land even within the Inland Empire itself are helping fuel the industrial market's growth.

"Today's vacancy rates are the lowest we've had in probably the history of the Inland Empire," said Ron Washle, senior vice president of Grubb & Ellis. "Developers are having to push farther east to find developable land."

They appear to be doing this, with 19 million square feet of space under construction in the market.

Total sales and leasing activity fell slightly during the second quarter, to 7.9 million square feet from 8.8 million square feet in the previous three months. But smaller submarkets such as Fontana, Redlands/San Bernardino and Corona all saw significant spikes in sales and leasing activity.

Ontario still remains one of the most active industrial submarkets, with nearly 113 million rentable square feet of industrial space and another 3 million under construction. Ontario also was home to the Inland Empire's biggest deal of the quarter, American Realty Advisors' $101-million-purchase of the Safari Business Center, a 1.1 million-square-foot, 16-building industrial property.

"Ontario will always be the hub. However, there are going to be outlying areas where you'll see significant increase in square footage and base," Washle said.

The Moreno Valley/Perris submarket, for example, has a vacancy rate at 0.3 percent, lower than the rest of the Inland Empire. But it has 854,869 square feet of new industrial space set to come online.

Other second-quarter industrial highlights included Koll Co.'s purchase of the Riverside Technology and Business Center, a 479,067-square-foot industrial project for $31.75 million.

On the leasing side, Walt Disney Co. took 284,000 square feet for five years in Ontario's Haven Gateway in a deal worth $5.2 million. In Fontana, Avery Dennison Corp. renewed its lease of a 410,208-squre-foot warehouse at Fontana Industrial Center, while Maytag Corp. inked a five-year, $7.5 million deal for 349,552 square feet of space at the Watson Commerce Center.

Although smaller, the Inland Empire's office market also continued its growth, with the market absorbing 731,000 square feet, nearly triple its net absorption a year ago. Vacancies dropped a point, to 7.4 percent.

Meanwhile, rising construction costs and lack of available land are driving area rents up. Overall asking rents climbed two cents, to $1.90 for a square foot for Class A space last quarter. Class B was up three cents, to $1.63, 15 cents more than they were a year ago.

The Inland Empire has nearly 1.4 million square feet of new office space in the pipeline. The area's expanding infrastructure, along with a demographic shift to an older, better-educated labor base have helped spur corporate migration to the area, said John Oien, vice president with CB Richard Ellis.

"Some of the tenants we've seen come into our marketplace in the last five years would never have considered it before," said Oien. "Investment banking firms and larger Ivy League law firms that have large offices in L.A., San Diego, and San Francisco are now opening up significant offices out here."

The Riverside, Ontario and San Bernardino submarkets remain the office hub of the Inland Empire, with more than 16 million square feet of office space combined, about 85 percent of the Inland Empire's base.

Ontario is in line to get 150,000 square feet of new office space when Transcan Development LLC's mixed-use project, Canyon Crossings, is completed. The project includes 740,000 square feet of retail and 144,000 square feet of Class A office space. Its first office building, which breaks ground this quarter, is 50 percent pre-leased. Canyon Crossings tenants will include Chapman University and Newbridge College.

Smaller office submarkets within the Inland Empire are also getting a boost, thanks to a boom in new housing construction.

"San Diego is saturated. There's a lot of growth moving north where the homes are going," said Natalie Bazarevitsch, first vice president with CB Richard Ellis. "A lot of local and regional firms want to locate close to their homes and those homes are in Murrieta and Temecula, so there's a mini-office boom going on down there."

Major Events:
& #8226; American Realty Advisors
purchased the Safari Business
Center, a 1.1 million-square-foot,
16-building industrial property, for $101 million.
& #8226; Koll Co. purchased the Riverside Technology and Business Center, a 479,000-square-foot industrial
project for $31.8 million.
& #8226; Maytag Corp. inked a five-year lease for 350,000 square feet of space at the Watson Commerce
Center for $7.5 million.
& #8226; PGP Partners Inc. and RREEF established a joint venture to develop 500,00 square feet of office space in Ontario. The project, called Ontario Office Towers, will be on 28 acres between Turner and Archibald avenues.

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