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A Growing Office Empire

As one of the nation's fastest growing suburban office markets, Ontario, Calif. is teeming with new development. With a booming local economy, cranes are rising all over this Inland Empire city of 171,000 located 35 miles east of Los Angeles.

Grubb & Ellis reports that Ontario's office market contained 3.7 million sq. ft. of vacant space as of mid-May with another 1.8 million sq. ft. of new space under development. Over the next two decades, roughly 1 million sq. ft. of new office space is expected to come on line annually. While some projects may never get completed, even conservative estimates point to a torrent of new supply.

“Speaking generally about the Inland Empire office market, we believe that the onslaught of new office construction will continue to drive vacancies higher,” says Suzanne Mulvee, research analyst at Boston-based Property & Portfolio Research. Mulvee expects 5 million sq. ft. of new office space to be completed through the end of 2008, pushing Inland Empire office vacancy up from 10% at midyear to 17% by the end of 2008.

“I think many developers may be getting ahead of themselves out here,” says Chris Atkinson, vice president of Bates Co., a locally based development firm. “If you saturate the market with supply, you will stagnate future growth.” Bates Co. has developed more than 500,000 sq. ft. of office projects in and around Ontario. Another 400,000 sq. ft. of local office projects are slated for completion by 2010.

Ontario's strong job market has the potential to absorb the thick pipeline as it hits the market in coming years. The Inland Empire added 48,150 new jobs in 2006, which helped the economy grow 3.9% over 2005. Meanwhile, the Inland Empire's local unemployment rate registered 4.6% in 2006, lower than the national rate of 5%.

The healthy labor market has helped the office market to an extent. However, while 29,477 sq. ft. of office space was absorbed in the first quarter, another 126,000 sq. ft. of new completions also came on line, driving vacancy to 12.1% from 9.8% the previous quarter, according to CB Richard Ellis. CBRE expects Ontario office vacancy to rise again during the second quarter when another 149,466 sq. ft. hits the market.

Mary Jane Olhasso, director of the Ontario Economic Development Corp., is confident that tenant demand will catch up with mounting supply. “We've seen so much [economic] growth in Ontario over the past few years, and the pace should continue,” says Olhasso.

One developer says that his speculative office project is already drawing interest from tenants. Jack Hileman, partner and president of The Hileman Co., is building a 150,000 sq. ft. office building in Ontario. “Plenty of companies are talking to us about this project, and many of them are considering a move from the Los Angeles or Orange County area,” says Hileman. His $40 million Waterside Center II project will be completed next July.

In 2006, the U.S. Census Bureau identified the Inland Empire as the 14th largest metropolitan area in the nation by population, up from the 35th largest metro area in 2000. Southern California economist John Husing believes the greater Ontario region still needs space for its growing employment base.

“[Ontario] is a huge population base and huge economy that is growing faster than every other part of southern California,” says Husing, vice president of independent consulting firm Economics & Politics Inc. He projects that the region will add 37,200 jobs in 2007, down from the 48,150 added in 2006. “Southern California's edge community economies have always grown up in waves.”

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