Strong demand for industrial space in the Inland Empire caused rents to increase again during the third quarter.

The region absorbed 6.7 million square feet of industrial space during the July-September period, according to Grubb & Ellis Co.

Industrial asking rents rose to 40 cents a square foot, 2 cents above both the second quarter and year-earlier period. The vacancy rate rose only slightly, to 2.8 percent from 2.7 percent in the previous three months, despite rampant construction in the region.

Fontana was one of the most active industrial submarkets in the third quarter, with more than 1.8 million square feet of sales and leasing activity. More is on the way: at the end of the third quarter, Fontana had nearly 4.9 million square feet of industrial buildings under construction, more than any other submarket in the Inland Empire.

This includes an 849,000-square-foot distribution facility that will become part of Fontana's ProLogis TransPark. The building is pre-leased to Mohawk Industries Inc., a floor covering manufacturer and distributor, for an undisclosed amount. Also in Fontana, LG Electronics Inc. leased 544,717 square feet of industrial space in Kaiser Commerce Center from Catellus Development Corp. in a 10-year deal worth $22.5 million.

Walt Chenoweth, senior vice president with CB Richard Ellis Group Inc. in Ontario, said much of the Inland Empire's new industrial construction is taking place to the east in markets such as Redlands/San Bernardino and Moreno Valley/Perris.

"There aren't as many large buildings available in the traditional Inland Empire west marketplaces like Ontario," he said. "So tenants have had to expand their search areas further out."

Still, Erin Madison Ltd. found 10.5 acres to purchase in Ontario for $2.9 million and has begun construction on West Ontario Industrial Park, which will be made up of 12 freestanding industrial buildings totaling 213,064 square feet. The project is slated for completion in April 2006.

The smaller Moreno Valley/Perris submarket saw its vacancy levels nearly disappear in the third quarter and will add an additional 1 million square feet of space to its 6.3 million- square-foot base when projects in the works are completed. The Redlands/San Bernardino market, with a 1.8 percent vacancy rate, will increase its industrial base by nearly a quarter once the 4.3 million square feet under construction come online.

Region-wide, the 19.1 million square feet of industrial space under construction at Sept. 30 will increase the Inland Empire's industrial base by 6.1 percent.

Unstable supply costs could steer future buyers and tenants away from build-to-suit projects and into pre-existing buildings or these projects where construction is well under way, according to Chenoweth. Adding to shortages of cement and steel, the Gulf Coast hurricanes have decreased the overall lumber supply, while high oil prices have driven up the cost of asphalt.

"It's very hard to quote a firm end price on construction that hasn't yet broken ground because (developers) don't even know what the total cost to build their building will be," he said.

In one of the bigger industrial deals last quarter, TIAA-CREF purchased a 468,862-square-foot property in Rancho Cucamonga from Panattoni Development Co. LLC for $35 million. Also changing hands was an 800,000-square-foot industrial property on 50 acres in Colton. Stater Bros. sold it to Hager Pacific Properties for $30 million.

Office market
The Inland Empire office market, while just a fraction of the size, saw brisk activity as well, as vacancies fell to 7.5 percent in the third quarter from 9.2 percent in the year-earlier period.

As a result, asking rents on Class-A space rose 6 cents from the second quarter to $1.96 a square foot, and were 11 cents above year-ago levels.

"Occupancies are higher, lease prices are higher and sales prices are higher all across the board. Demand seems to be constant if not increasing," said Greg Martin, a principal at Lee & Associates in Ontario.

He said Corona has one of the healthiest office markets, thanks to its proximity to Orange County and its popularity with residential housing development firms. Centex Homes, Dos Lagos and Ryland Homes all have offices in Corona.

"They can cover Orange County, Temecula, Murrieta, Riverside, the High Desert," Martin said. "It's very central to a lot of the locations where residential housing construction is occurring."

The Riverside office submarket, which includes Corona, saw its vacancy rate jump 2 points in the third quarter, to 7.3 percent from 5.2 percent in the second quarter. Class-A office rents of $2.12 per square foot remain among the highest in the region.

In the Ontario office market, vacancies fell to 4.5 percent in the third quarter from 7 percent in the second quarter, leaving it with one of the lowest vacancy rates in the Inland Empire.

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