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Inland Empire construction activity is booming, exceeding San Diego output

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The Inland Empire isn't a backwater anymore as millions of square feet of office and industrial space are under construction, substantially surpassing San Diego County.

"The Inland Empire is the top market in the nation for new construction of industrial space -- the vast majority for warehouses and distribution centers serving the nearly 40 percent of all goods from Asia that pass through the ports of Los Angeles and Long Beach," said a new Casden forecast out of University of Southern California.

The report said some 21 million square feet of industrial space is currently under construction in the corridor that includes San Bernardino and southwest Riverside counties.

By way of contrast, a recent CB Richard Ellis (NYSE: CBG) report said nearly 4 million square feet of industrial space was under construction in the San Diego region as of the end of the third quarter. That total includes 1.1 million square feet of industrial space under way in Temecula/Murrieta, which CBRE considers as part of its regional total here, even though it is in the Inland Empire.

"Demand is strong with year-to-date absorption of 15 million square feet, in line with last year," the USC report stated.

The Perris community lays claim to what the USC forecast said is the largest speculative industrial building in the United States -- a 1.7 million-square-foot distribution warehouse by IDS Real Estate Group.

"The recent trend of building giant, speculative warehouses is pushing development into the eastern part of the region," the report continued. "Short-term demand is trailing supply in certain submarkets, but long-term prospects remain healthy and robust."

The Temecula/Murrieta market is adding some 1.1 million square feet of industrial space of its own, according to a recent separate CBRE third-quarter report.

The USC paper said even with all the industrial construction, the industrial vacancy in the Inland Empire was at a mere 4.3 percent at the end of the third quarter.

"Market-wide vacancy rates should remain under 5 percent through 2007," the report said.

"Though recent job expansion in the industrial sector is slower than in previous years, the future looks promising," the USC report said. "Significant job creation is taking place at the conversion of the former George Air Force Base in Victorville into the Southern California Logistics Airport."

As for rents, the USC report said that even with double-digit increases pushing industrial rents past the 40-cent-per-square-foot mark, the situation is still very competitive with Orange and Los Angeles counties.

Both the Inland Empire's industrial and office sectors have been fueled by the fact a population that now exceeds 3.9 million is growing by an average of 100,000 per year. About 25,000 jobs were estimated to have been added in the Inland Empire this year alone.

The amount of industrial employment growth was not immediately clear. The USC report said that despite the fact that residential activity has considerably slowed down, office employment is growing at about 7 percent annually.

"The growing population is drawing banks, escrow companies and attorneys into the area," the report added. "The fact that skilled employees are willing to accept lower wages in return for a shorter commute has also drawn firms focusing on medical equipment, computer technology and electronic and precision instruments."

The Inland Empire's overall office vacancy rate of 7.3 percent is among the lowest in the nation, according to the report.

"Class A office rents increased nearly 8 percent in 2006, to $2.11 per square foot, the highest in six years," the report continued. "Almost 3 million square feet of space is under construction, double last year's levels. Widespread development should continue in line with the maturing economy."

The USC report said the Inland Empire's office absorption amounted to 884,000 square feet through the first three quarters of the year.

In Orange County, landlords and brokers will have to work hard if they hope to fill the 4 million square feet of office space under construction in that market. The good news is 36 percent of that was pre-leased as of the end of the third quarter, and sales are said to be brisk in Orange County as many tenants seek to own their own buildings.

"Although office space demand is slowing somewhat, market fundamentals should remain healthy as companies as companies are attracted to the vibrant local economy and skilled local labor force," the report stated in the Orange County section.

The report said Orange County's industrial market remains very strong, like most of the other industrial markets around Southern California.

"Demand for industrial space in Orange County remains robust, with vacancy rates below 5 percent with 1.4 million square feet of industrial space under construction in the third quarter," the report stated, adding this should fill quickly.

It said south Orange County (which competes with North San Diego County markets such as Oceanside) had an average industrial rents in the state of $1.11 per square foot. The rents reportedly climbed by some 14.5 percent during the third quarter alone.

By way of comparison, the CBRE report said the San Diego region had an average $1.05 per square foot industrial space rate at the end of the third quarter. The rate has been climbing an average of about 3.9 percent per year during the course of the past three years.

Industrial construction completions in the San Diego region amounted to more than 1.95 million square feet during the third quarter, according to CBRE.

Although there was no shortage of space under construction, the San Diego region's industrial vacancy, which closed out the third quarter at about 5.4 percent, is still projected by CBRE to remain within a percentage point of that figure throughout next year.

The San Diego region's office market absorbed 352,000 square feet in the third quarter and 611,000 square feet through the first nine months of the year, according to CBRE.

CBRE said there was some 3.29 million square feet of office space under construction in the San Diego region -- including Temecula/Murrieta - at the end of the third quarter.

The CBRE report said with all the speculative construction, countywide office vacancy rates are expected to climb from about 9.7 percent as of September 30 to about 12.7 percent at the end of next year. Given that a 10 percent vacancy is an industry standard for a balanced market, this is still considered to be quite healthy. The vacancy is expected to tighten in 2008.

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