Lure of the Desert In a Hot Market

Lower prices are luring Californians to the Inland Empire, an expanse of tract homes, suburban office buildings and warehouses that sprawls east from the Los Angeles County line to the Nevada border. This desert land may not have the allure of the Pacific coastline, but no one can ignore the growth. In an area roughly the size of West Virginia, the Inland Empire’s population has surpassed Oregon’s.

Shopping centers, such as the upscale Victoria Gardens in Rancho Cucamonga, are adding thousands of jobs to California’s Inland Empire.

With a median home price of $325,350 last year, compared with $470,490 in Los Angeles and $578,750 in San Diego, people are moving in at a rate four times the national average. Last year, that amounted to 109,000 new residents in Riverside and San Bernardino counties, with Riverside emerging as the metro area’s largest city.

Demand for real estate has been robust, holding commercial vacancy rates down. However, with easy money and no shortage of sites, developers are scrambling to build offices, warehouses, apartments and shopping centers. According to real-estate analysis firm Property & Portfolio Research Inc. of Boston, the most dramatic expansion will be seen in the office market, where 2.1 million square feet of new supply will likely push vacancies from 13% in 2004 to 15% in 2005.

The longtime agricultural area, which brought orange trees in from Brazil and shipped the fruit out by rail, got the title of “Orange Empire” in the 1800s. Despite water from underground aquifers, Northern California and the Colorado River, the area remains far less developed than Los Angeles and Orange County. Traffic and pollution are problematic, but that’s not slowing the growth.

The industrial market will add 10.5 million square feet of manufacturing and warehouse space this year, but companies are expected to sign for almost all of it, setting up distribution centers close to Southern California’s ports and to other fast-growing cities such as Las Vegas and Phoenix.

Companies such as Solo Cup Co. and Big 5 Sporting Goods Corp. signed big leases, keeping the industrial vacancy rate steady at 8.5%, according to PPR. But rental rates are still climbing and total returns beat the national average. Naturally, this is attracting national investors, with 7.2 million square feet of warehouse space sold in the past six months, at an average of $56 per square foot, slightly below the national average but up a bit over the previous six months, according to Real Capital Analytics Inc.

Big industrial parks are planned for the west side of the region, where DHL Worldwide Network will land an air-cargo hub. To the east, Dallas-based Hillwood Investment Properties is redeveloping the former Norton Air Force Base, with facilities for discounter Kohl’s Corp., toymaker Mattel Inc. and regional grocer Stater Bros. Holdings, which is moving its corporate headquarters to the site.

The retail sector added thousands of new jobs last year, with the opening of new centers, such as the upscale 1.2 million-square-foot Victoria Gardens in Rancho Cucamonga. The open-air shopping center, developed by Cleveland-based Forest City Enterprises Inc., debuted the area’s first Williams-Sonoma, Talbots and Apple Store outlets.

Despite all the new construction, population growth should sustain the retail market going forward, according to PPR. The Inland Empire has more families with children than any other metro area in the country, and median household incomes are 10% above the national average.