SAN BERNARDINO, CA-The Inland Empire, and more specifically San Bernardino County, is leading the country in not only industrial investment but also in overall recovery. So says Darla Longo, vice chairman of CBRE, who, over the last 12
months, has leased and sold (in the Inland Empire alone) more than 12.5 million square feet totaling more than $635 million.

GlobeSt.com: Can you describe the state of the Inland Empire industrial investment market and what
does the average deal look like today?

Longo: A couple of years ago, as US markets finally found the road to economic rehabilitation, the Inland Empire emerged as a national leader in lease recovery. The turnaround was driven by leasing agreements with large tenants in buildings in excess of
500,000 square feet. With an acceleration of rents, capital markets identified the Inland Empire as one of the main drivers in the logistics supply chains for the Western US.

A deal we just closed in Fontana, CA is a good example. We closed a 600,000-square-foot, 30-foot clear ESFR building that ended up trading at slightly below a 5 cap rate. The deal’s success can be explained with the well-known real estate mantra, “location location location”—it was a brand new state-of-the-art building located at what we refer to as “main and main” in the
city of Fontana for approximately $70 a square foot. Right now the Inland Empire, and more specifically San Bernardino County, is leading the country in not only industrial investment but also in overall recovery. Cap rates have significantly compressed and we’re even experiencing a lot of activity in class B industrial buildings that have been trading in the 5.5% to 6.5% cap range.

GlobeSt.com: What firms are most active right now in the area?

Longo: We have seen TA Associates Realty and Industrial Income Trust make a lot of investments throughout the Inland Empire. Other active players include KTR Capital Partners and LaSalle Investment Management out of Chicago. But significantly, a lot of investment flows from groups already active in San Bernardino County, such as Hillwood. They have been both an active buyer as well as seller of industrial buildings in the area. The Inland Empire is now number one on every
institutional buyer’s list. Previously the spotlight was pointing elsewhere—now we’ve become the darling of the country.

GlobeSt.com: How does the region rank on a national basis?

Longo: Buildings built in the Inland Empire are the most state of the art industrial facilities throughout all of the country. They feature high classified ESFR sprinkler systems, minimum 30’ clear heights and excess trailer storage. These are extremely
marketable features that demonstrate how we are so far ahead of the rest of the country. Our industrial base typically does not consist of the old and outdated buildings; some owners are looking to reconfigure some of the older manufacturing buildings to ensure they are state of the art.

GlobeSt.com: What are some of the drivers for major corporations locating to the Inland Empire?

Longo: Proximity to the Ports of Los Angeles and Long Beach is invaluable, and right now this type of logistical space is limited. Technology has advanced; companies need to move to the Inland Empire if they want state-of-the art facilities and trailer storage. If you look at the roster of tenants active in the region, it’s the who’s who of big name industry. For example, Nike brings their goods into the warehouse and would then ship to Target’s and Wal-Mart’s distribution buildings. Most
companies want to locate in Inland Empire because that’s where a majority of their clients and customers are. Businesses can break-down and deliver-down to warehouses located just beyond their own backyard. Locating in the Inland Empire ups-the-ante by offering unique logistical synergies.

GlobeSt.com: Why is the area known as an Inland Port and is the Panama Canal a threat to the
region?

Longo: When a container comes into port, they offload and truck out to the Inland Empire. After this one-way delivery, our two intermodal yards become extremely valuable to truckers that understand an empty truck is a profitless truck. Because Inland Empire is a market teeming with clients, truckers can pick up another load-out for the return trip. That’s why we’re an inland port for Los Angeles. We have the intermodal yards, proximity to ports, and over 400-million-square-foot
industrial base. There is a significant and beneficial synergy created just by the amount of companies that are out here today. Our two intermodal yards are strong drivers for companies that understand this logistical tactic.

The Panama Canal has become less of an issue predominantly because the container ships have expanded in size and the largest ships cannot go into the Panama Canal. The volume at our ports has stabilized and continues to grow. Most experts report that they don’t see it as a huge impact on Southern California.

GlobeSt.com: What are the additional advantages to doing business in the Inland Empire?

Longo: I would say that San Bernardino County is one of the most proactive counties for business in California; and this, along with the amount of land available for growth, makes the area extremely advantageous. The County is extremely attuned to business and opportunities for growth—even in a national context. I tell tenants that the reason to locate in San Bernardino County and the Inland Empire as a whole is that it is a proven port entry. We have a significant balance of corporations, some of the lowest cost labor and affordable housing. If you move out here you can also afford to live out here. Plus we have the lifestyle. The beaches, desert, and mountains are within an hour drive. It’s an incredible draw for anyone.

SAN BERNARDINO, CA-Few markets were harder hit by the Great Recession than the one-time boom towns of Southern California and the Southwest. Sandwiched between the two, San Bernardino County (booth CW149 at RECon) saw its own struggles.But now the region, particularly in and around San Bernardino County, is staging a comeback, with rising rents and even the glimmers of new construction. Scott Kaplan, senior vice president of CBRE, spoke with GlobeSt.com about the retail resurgence of San Bernardino County, the Inland Empire and the continuing challenges facing retail nationwide.

GlobeSt.com: How is the recovery going in the Inland Empire?

Kaplan: We are seeing an increase in retail sales in most of the markets of the Inland Empire region, in all sectors. Discount, power centers, community centers, even luxury is on the mend. We look at the bellwether projects for our market, the Mall of Victor Valley, the Shops at Chino Hills, Victoria Gardens, etc., and we’re hearing that the revenue numbers for most of them are up 5% to 10% over a year ago.

GlobeSt.com: Are some cities bouncing back more than others?

Kaplan: Yes. We’re following common post-recession recovery patterns. They typically run coastal and urban, then inland. Last year we felt it in the markets touching the coastal markets. Chino Hills would be in recovery a year ago. Ontario would have been a market recovering a year ago. Now, the recovery rings have expanded to more markets, including the high desert region, Victor Valley, etc. If there were three recovery regions last year in our market, there may be seven or eight this year that are stronger.

GlobeSt.com: Is this affected by the status of Los Angeles or Long Beach?

Kaplan: I don’t know that we’re related to those economies. In general, what happens in retail is that retailers feel more
comfortable expanding where there is dense population and where New York says capital should be. The biggest difference between a year ago and today [is that Las] Vegas, Phoenix, and the Inland Empire were all “Red X’ed” in the capital
markets until, probably, this year. We’ve seen that turn on like a spigot, which has been very helpful to stimulating our local economy. Capital, of course, is the oxygen of everything we do in all the product types.

GlobeSt.com: What retailers are expanding besides the Macy’s to coming the Mall of Victor Valley?

Kaplan: Neiman Marcus Last Call at Ontario Mills is an important name. The Mills has been up significantly over the last three years as they’ve added more tenants, and Neiman Marcus is an important name for them and for our market. Macy’s has been slow to do deals across the country. As we understand, they’re only opening three stores next year, and one of them will
be at the [Mall of Victor Valley], which we think is a defining moment for our market.

Charming Charlie is expanding across our market, doing multiple locations. We’re working on a luxury theater deal in Ontario, Cinetopia out of Vancouver, WA. The lifestyle sector has been beaten up across the country, and has weathered the storm. The brands that are still here are the brands that are expanding. It cold be Coach, White House Black Market, Chico’s. Rue 21 did a deal in Apple Valley.

We tend to generalize in our business. We tend to say “This sector is dead, this sector is expanding.” But generalizing is dangerous. It’s really the health of each individual retailer, and many of them are in a managed expansion mode.

JCPenney recruited senior level Apple executives to reshape the JCP brand, and is doubling its size at the Mall at Victor Valley.
They’re reformulating their brand, but the fact that they’re doubling their size in our market is pretty meaningful and a big statement.

Overall, the national benchmark for retail is sales per square foot. Just to pick a number, $400 per square foot in sales performance is thought of as the top 25% of projects in the country. All of our [bellwether] projects, including the [Mall of Victor Valley] are running over that benchmark, and I think that’s meaningful.

GlobeSt.com: Does that mean that this recovery is sustainable?

Kaplan: Nobody knows the answer to that, except that we’ll be able to retroactively look back and see whether what I’m about to say is right or wrong. It’s just the cycles. Last year you started to see pockets and sporadic markets and green shoots. This year, there is clearly a pattern. We track demand, vacancy and, obviously, capital is critical.

We have a lot of developers and architects calling us again. The Architectural[Billings] Index, which measures the workload of the top 100 firms in the country, is at its highest rate for our market since 2006. When a recovery happens, architects are usually the first guys to get the call. Our architects are very busy and hiring back.

We’re seeing land trade again, and prices that were very, very depressed snap back in the retail sector. Last year, they snapped back in the industrial sector, and they’ve snapped back in the multifamily sector in our market. But clearly, there was little to no retail development, and we’ve been working on and have knowledge of many projects that have been restarted and replanned. There will be a runway period from the time we know about those until we see sticks in the ground, but once that gets going, it takes another three to five years to get those projects done and expanded. Really, it’s about retail demand and what retailers are telling Wall Street. It’s about their expansion plans.

One thing we haven’t had snap back is our housing and unemployment. We’re not tracking as well as the rest of the country, but
unemployment is improving over a year ago, and you can’t imagine the number of builders who are building apartments. When it’s this heated, it usually signifies that we’re at the end of the multifamily cycle or that we’re peaking. We’re starting to hear single-family residential developers buying residential lots. That’s a very good sign if we can get the single-family market going in the right direction.

Is it going to be a protracted recovery? This year, it feels like there are too many signs for it not to be the start of the next new
cycle. If you asked me this a year ago, I would have been more cautious in my answer.

GlobeSt.com: What are you looking to do at RECON?

Kaplan: We have more meetings this year than we’ve had in
the last five years, which is emblematic of what we’ve been discussing.

Mark Mueller of Orange County Business Journal reports:

Newport Beach-based real estate investor Greenlaw Partners has bought a high-end Ontario office complex in what looks to be the priciest office sale the Inland Empire has seen in a few years.

Greenlaw partnered with Chicago-based private equity real estate investor Walton Street Capital LLC to buy the Waterside Center office park, a three-building office complex next to Ontario International Airport.

The 303,000-square-foot project, which includes a trio of midrise offices located between the San Bernardino (10) Freeway and the airport, changed hands at the end of January for about $34 million, or roughly $112 per square foot.

That’s more than double the price of the highest office sale reported in the Inland Empire in the past year, according to brokerage data.

It’s also believed to be the biggest investment sale in the region since 2007, said Kevin Shannon, vice chairman for the Torrance office of CBRE Group Inc., which brokered the sale.

The deal still looks like a bargain for its new owners compared with the project’s valuations during the last commercial real estate boom.

The then-two-building campus, part of Ontario’s Centrelake business park, traded hands for a reported $53 million in 2007. A third office was built on the campus over the next year.

Initial Expectation

The campus was expected to have a valuation of nearly $125 million upon the completion of the third building, according to the project’s prior owners, Beverly Hills-based Hileman Co. and Pacific Coast Capital Partners LLC of Los Angeles.

Waterside’s valuations soon fell as office vacancies in the area grew and rents nosedived amid the economic downturn.

The project counted an occupancy rate of about 40% at the time of the recent sale, Shannon said.

Waterside Center’s three buildings were all built between 2005 and 2008, and run from three stories to six stories.

The newest building at the complex is also the largest, totaling 142,602 square feet. That building is empty, accounting for a majority of the vacancy at Waterside Center.

The property, located near the intersection of Guasti Road and Haven Avenue, also is entitled to hold a 150-room hotel, which has yet to be built.

Tenants at Waterside Center include the University of Phoenix and manufacturer Brady Corp.

“The Inland Empire experienced more pain than other markets,” said Shannon, who worked on the deal with colleagues Scott Schumacher, Ken White, Darla Longo, Barbara Emmons and Philip Woodford.

Ontario’s office market totals about 4.5 million square feet—approximately the same size as Brea’s. Ontario ended 2011 with an availability rate of just under 25%, according to market data from Newport Beach-based Voit Real Estate ServicesClass A buildings in the entire Inland Empire office market total about 6.7 million square feet of space, and have a current availability rate of about 24.5%, according to Voit’s data.

Expect to see other examples of some sizeable Inland Empire office projects in the area getting sold at steep discounts this year, Shannon said.

Another Orange County-based investor, Newport Beach-based Davenport Partners Inc., paid a reported $15.6 million for Ontario’s Towers at Riverwalk office campus last October.

That deal was 2011’s priciest office sale in the Inland Empire, according to brokerage data.

Waterside Center was sold by New York-based Gramercy Capital Corp. which had been a lender on the project. Regulatory filings show Gramercy taking the Ontario property from its prior owners over in mid-2010.

Greenlaw and its financial partners has made a series of similar acquisitions to the Waterside Center deal over the past few years, buying largely-empty office projects at steep discounts to their peak-market prices.

In the most prominent example, Greenlaw, Walton Street and Westbrook Partners LLC of New York paid about $56 million for Irvine’s 2050 Main Street office tower in 2009, when the building was about half-full.

After leasing up the tower, the investors sold the building late last year for about $108.5 million to an affiliate of Boston-based AEW Global in Orange County’s largest —and likely most profitable—office sale of 2011.

4000 Metropolitan

Other area buildings to draw investments by Greenlaw and Walton Street include 4000 Metropolitan Drive, a 183,000-square-foot office located next to The Outlets at Orange shopping center that was bought in late 2010 for just under $12 million.

That office—where the Federal Bureau of Investigation signed a 20-year, 100,000-square-foot lease last year—is rumored to be going on the market later this year and could fetch close to $50 million, according to real estate sources.

In the December 7 issue of the Wall Street Journal, MATTHEW STROZIER reports:

Developers in Southern California’s Inland Empire are moving forward with the region’s first speculative warehouse and distribution-center projects since the downturn, in a sign of the surprising resilience of consumer spending.

During the depths of the recession, few would have bet on construction appearing this soon in this region east of Los Angeles that was clobbered by the housing crisis and recession. By the end of 2008, the market had a glut of 36 million square feet-the equivalent of more than 600 football fields-of empty industrial space, as home builders, area businesses and other would-be tenants cut back on their supply pipelines.

But CBRE Group Inc. reports that about 11 million square feet has been absorbed thanks partly to the steady increase in retail sales. Despite the struggling economy, consumer spending on discretionary items has increased 16 consecutive months through November, according to the National Retail Federation. The current holiday shopping season also is off to a healthy start.

Indeed, developers are moving forward with eight speculative warehouse buildings in the Inland Empire, totaling about 4.8 million square feet, according to commercial real-estate brokerage Jones Lang LaSalle Inc. These warehouses typically target a single tenant, either a logistics company or big-box retailer like Wal-Mart or Home Depot.

Take the case of a speculative 692,000 square-foot warehouse being developed in Moreno Valley, Calif., in the eastern side of the Inland Empire. The $44 million development, designed with a state-of-the-art “cross-dock” loading system and 11 acres of trailer parking, is the first new warehouse project for First Industrial Realty Trust Inc., a Chicago-based real-estate investment trust, in over three years.

First Industrial bought the land for $14 million in 2007 when prices still were high. Then the market took a turn for the worse, and the company was forced to wait for conditions to brighten.

But First Industrial broke ground earlier this year as demand from big-box retailers pushed rents higher. On average, Inland Empire landlords are asking $3.88 per square foot on single-tenant warehouse properties of at least 250,000 square feet, an increase of 8% from one year ago, according to Boston-based Property and Portfolio Research, a forecasting firm. The vacancy rate has dropped to 1.5% for single-tenant facilities that are 500,000 square feet or bigger.

“You build spec if the demand is there and the supply is minimal,” says Johannson Yap, chief investment officer for First Industrial. “When you meet the market at the right time, you can achieve pretty good rents.”

The Inland Empire-the country’s seventh-largest warehouse market with just under 400 million square feet-still is much cooler than it was during the boom years. In 2006, for example, developers added 64 speculative projects with a total of 25.8 million square feet, according to Jones Lang.

This year, leasing appears to be on pace to beat last year’s volume of about 31 million square feet, with big leases being signed by companies like Hewlett-Packard Co. and scooter-maker Razor USA LLC. While that is a big improvement from 2008, when volume was about 20 million square feet, it is below 2005, when leasing volume came close to 35 million square feet.

Also, neither First Industrial nor other developers with projects under way have leased their space yet. This raises the specter that developers are once again getting a little too enthusiastic. But developers and brokers say numerous tenants are looking for space in the Inland Empire market. Mr. Yap says that demand is being driven by consumer imports from Asia and companies consolidating distribution to save money.

The Inland Empire is popular because the region’s warehouse stock is relatively new, but its rents are lower than in Los Angeles and Orange counties. A network of highways and rail lines provide access to the busy ports of Los Angeles and Long Beach.

Elsewhere in the country, industrial leasing is recovering much more slowly, if at all. Vacancy remains high compared with the boom years, and construction starts are way down, according to data from CoStar Group Inc.

“Overall, in most markets, rents cannot justify spec development,” says John DiCola, head of investments at KTR Capital Partners, a New York-based private-equity firm that builds and acquires industrial real estate. “We don’t expect to see it in most of the markets.”