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.

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.