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Inland Empire has glut of office space; more on the way

The massive office building boom that has characterized the Inland Empire office market is coming to an end, and with a 22.7 percent vacancy rate, the pending stoppage is none too soon.

Colliers International reports there were no new office completions in the Inland Empire office market in the second quarter for the first time in more than five years, which, given the vacancy, is hardly surprising.

The Colliers report said the office vacancy rates were highest for Class A office space (37.2 percent) and in the Corona submarket (41.9 percent), primarily due to excessive building over the past two years.

The Inland Empire's office market building boom peaked in the second quarter of 2007, which at the time had 4.3 million square feet of office space under construction. Office development has quickly declined since then as the economic fundamentals that underpinned the Inland Empire office market have collapsed.

The weighted average asking office rental rate for the Inland Empire stood at $1.96 for the current quarter, down 6 cents from $2.02 in the previous quarter and down 15 cents from $2.11 a year earlier. Office rents are currently at levels last seen in the first quarter of 2007, when the total vacancy rate was 11.5 percent -- less than half the current level.

While office rents haven't declined much, a significant downward pressure on rents is expected for the foreseeable future as the Inland Empire office market continues to deal with oversupply issues.

Leasing activity remains low, with tenants moving into only 175,700 square feet of office space in the second quarter -- the lowest level of activity ever recorded in the Inland Empire office market.

The largest transaction in the second quarter was the County of San Bernardino Superintendent of Schools taking 31,300 square feet of office space in San Bernardino.

The San Bernardino submarket was the most active in the Inland Empire, with leasing activity totaling 63,400 square feet, followed by Riverside County with 41,600 square feet.

The Inland Empire region posted 54,500 square feet of negative net absorption during the second quarter and returned 208,600 square feet of office space during the first half of the year.

Employment reductions continue to weaken the demand for new office space. Nonfarm employment in the Inland Empire had declined by nearly 78,000 jobs in the 12-month period ended in June.

"The Inland Empire's unemployment rate of 13.0 percent is significantly higher and has been deteriorating at a quicker pace then neighboring Los Angeles County, which has an unemployment rate of only 10.9 percent," the report added. San Diego County had a 10.1 percent unemployment rate as of the end of June, according to the U.S. Bureau of labor Statistics.

"With an estimated 232,500 Inland Empire employees currently out of work, demand for commercial space is at an all-time low, with no prospect of a quick recovery," the Colliers report continued.

If there is good news on the office front in the Inland Empire, it is that no new space was completed in the second quarter. However, even without new construction in the last quarter, the Inland Empire still has added 1.5 million square feet of new office space in the past 12 months to an already glutted market, and another 454,700 square feet is currently under construction.

Most of the major office projects currently under way are in Riverside and include Regency Tower, a 251,000-square-foot Silagi Development project; Riverside Edgemont, a 94,000-square-foot office project; and the 45,000-square-foot Riverside Global Corporate Industrial Park.

Although the 454,700 square feet of office space currently under way is a problem, it is still down significantly from a year ago, when about 2 million square feet was under construction in the Inland Empire.

In conclusion, the Colliers report said with the deteriorating economic conditions, many firms will either utilize smaller spaces or delay their expansion plans. In any case, more space givebacks may be expected in the Inland Empire over the next several months.

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