Inland Empire: From Boom to Bust to Boom Again

By GRAHAM WITHERALL

Jan. 7, 1998 12 AM PT

SPECIAL TO THE TIMES

When the nine-story Empire Towers office building was planned in Ontario in the late 1980s, the Inland Empire’s commercial market was enjoying an unprecedented expansion. But boom had turned to bust by the time the project was completed in 1991.

“The day it opened was just about the day the market crashed,” said Mark Jacobs, leasing officer for Baltimore-based American Trading Real Estate Properties Inc., which developed the building.

Half of Empire Towers’ offices stood vacant for several years as American Trading and the rest of the Ontario real estate industry waited for good times to return. Finally, the waiting is over.

Empire Towers is now 96% occupied, and American Trading is poised to break ground on an adjacent three-story office complex.

“It took longer than we anticipated for this market to recover, but we’re very optimistic about Ontario now,” Jacobs said.

American Trading is not the only company sensing that the Inland Empire is ripe for new construction. In fact, Ontario is in the midst of a remarkable wave of commercial development.

Not far from Empire Towers stands the year-old $150-million Ontario Mills discount mall, billed as the busiest shopping center in Southern California.

Just up the freeway, Ontario International Airport is getting a pair of new terminals at a cost of $250 million to relieve overcrowding. Roads leading to the airport are receiving a $137-million overhaul.

Nearby, the $66-million Ontario Convention Center opened in November and has already booked groups ranging from the American Spaniel Club to the Lutheran Women’s Missionary League.

Ontario city officials estimate that $1.3 billion worth of real estate construction is underway or has been completed in the last year, including several major warehouse projects.

“Things are definitely booming again out here,” said George Urch, spokesman for the city.

That’s not to say that the city’s building scenario is entirely rosy. About 20% of its offices and almost 10% of its industrial space are vacant, leading some observers to question whether all the new buildings are sustainable.

And landlords still cannot command the kind of lease rates they enjoyed in the late 1980s. Industrial property, for example, fetches a monthly rate of about 25 to 28 cents per square foot, up from a low of 16 cents five years ago, but still down from the 1980s peak of 30 to 35 cents.

But those concerns are outweighed by the positive factors fueling the market.

The airport, shopping mall and convention center projects are expected to make Ontario a busier and more vibrant area, and Southern California’s economic recovery has boosted demand for warehouse space. With three rail lines and three freeways crossing the city, Ontario has earned the reputation as the ideal location for Southern California distribution centers.

“You can go down the list of Fortune 500 companies and find virtually all of them here, from Caterpillar and Coca-Cola to Frito-Lay and dozens of others,” said broker Scott Ostlund of Lee & Associates Commercial Real Estate Services.

That trend shows no sign of reversing. In recent months, Timberland moved into a 350,000-square-foot building and Sweetheart Cups occupies a 370,000-square-foot site.

The transition to “big box” warehouses is also changing the Ontario landscape. In 1997, 5.7 million square feet of industrial space was built, about the same as in 1988. But although that footage was spread over 119 new buildings in 1988, the same footage was contained in just 24 new buildings last year.

“Everyone is looking for large, state-of-the-art industrial buildings,” said David Consani, an industrial specialist with CB Commercial Real Estate.

Another trend that has buoyed the Ontario market is an influx of high-quality firms buying into the region. Several major public companies, such as Meridian Point Realty Trust, Pacific Gulf Properties and Spieker Properties, have purchased Ontario-area properties in the last year.

“We think Ontario will continue to benefit from its physical location, which is in the path of growth,” said Craig Vought, chief financial officer for Spieker. Spieker purchased One Lakeshore Center--an eight-story office building--in December 1996.

The final factor driving growth in the local real estate industry is maturation of Ontario into a self-sustaining market. At one time, the only way to lease space was to lure a tenant from Orange or Los Angeles counties or find a company looking to establish its first Southern California warehouse.

Now, several tenants--including Border’s books and Longs Drugs--are expanding within the market, proof, some say, that Ontario has arrived.

“It used to be that most of the market was driven from people outside the area,” Ostlund said. “Now, about 65% of the business comes from companies expanding or moving within the market.”

Looking ahead, several ambitious commercial real estate projects are on the Ontario horizon. The city recently purchased 40 acres with plans to construct a sports arena for minor league hockey and basketball. The airport, meanwhile, has bought 100 acres with long-term plans for additional expansion.

In December, Lewis Homes and the Sares-Regis Group in a joint project purchased 256 acres on the site of the former Ontario Motor Speedway with long-range plans of building a $300-million retail and residential development.

And even more ambitious development plans could be unveiled this year if Ontario succeeds in annexing 8,200 acres of county land now occupied mostly by dairy farms. The city is expected to rezone the area to allow nonagricultural uses, which some observers believe could ignite a new round of development.

“Some people are talking about the potential of a temporary glut of projects, but I don’t think it will be a problem,” said Doug Jorritsma of Grubb & Ellis. “A lot of properties are being quickly absorbed, and it looks like we’ve got three to five good years ahead of us.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Space in Ontario

Industrial Market

Total square feet: 64.1 million

Year-end comparison of vacancy rates:

1996: 9.2%

1997: 9.6%

Year-end monthly lease asking price, per square foot:

1996: $0.29

1997: $0.30

Office Market

Total square feet: 3.7 million