With its central, accessible location, relatively affordable prices and strong labor pool, the Inland Empire’s office sector is poised for steady growth. The Inland Empire is actually considered one of the top markets in the country in terms of population growth, job creation, construction and industrial space absorption — all of which bode well for the commercial office sector.
The Inland Empire market is composed of two submarkets: the East, containing Riverside, San Bernardino and Corona, among others; and the West, which includes Ontario, Rancho Cucamonga, Fontana and Chino/Chino Hills. Transaction volume is on the rise in both, and vacancy rates have been at some of the lowest levels seen in three years. This is partially due to some exceptionally large transactions recorded in 2012.
The largest and most significant was a 232,176-square-foot office lease transaction at the Atrium building in Rancho Cucamonga for Inland Empire Health Plans (IEHP). The lease was valued at nearly $100 million. IEHP currently serves more than 575,000 residents of Riverside and San Bernardino counties and is anticipating continued growth, which prompted the need for this space. With IEHP now occupying the building, the previous 60 percent vacancy has all but been eliminated.
This lease was one of the largest office transactions of the past decade and is helping to fuel the local economy. It’s added 800 new jobs in Rancho Cucamonga and established IEHP as the largest employer in the city. The lease has also created a more efficient operation by bringing all departments under one roof and allowing room for expansion. IEHP was able to consolidate four properties into one location — a trend expected to continue with both medical users and traditional office tenants.
While record-setting leasing was happening in the Western submarket, the East also continued to improve. It boasted high-profile transactions like the $17.4-million purchase of a prominent three-story building on Meridian Parkway along Interstate 215 in Riverside by the Regents of the University of California. While the office market is picking up in both regions, the West is definitely growing at a faster pace and has historically had less space than the East. With limited inventory available — particularly for large office users — rents are trending up and concessions are being reduced in both markets.
The average lease rate is 7 percent higher in the West, and the Rancho Cucamonga transaction has reinforced that trend. At the end of the fourth quarter of 2012, the total vacancy rate in the Inland Empire was 21.3 percent, which was fairly evenly divided between the West and the East. While each region had similar vacancy rates at year-end, the Rancho Cucamonga transaction was not reflected at that time and has reduced the vacancy rate in the West by a significant 13 percent.
With vacancy declining overall in the Inland Empire, rental rates are expected to continue to trend upward. This should trigger a shift toward a landlord’s market, with more significant increases built into leases and fewer dollars for tenant improvements. As markets improve, concessions will continue to decrease.
Decreasing vacancy rates may result in more new construction, such as the six-story, 141,000-square-foot Citrus Tower in Riverside that was completed in March 2012. With all this activity occurring, the future is bright for the Inland Empire office market.
– Nancy Daniels, director of real estate, Trigild