Building Boom Masks Slump

SB Sun

Commercial real estate oversupply lowers rents
Matt Wrye, Staff Writer
Article Launched: 08/10/2008 07:56:24 PM PDT

Even in a bum economy, Inland Empire office-space builders are finishing multimillion dollar projects and putting bread on the table for construction workers.

But don't be fooled.

If anything, it's an omen of tough times around the corner - not for tenants, but for the developers who invest heavily in concrete, steel and glass.

It could take five to seven years - and maybe even longer - for commercial brokers to lease a boatload of existing office space and projects under construction because builders overshot the market.

"A five- to seven-year supply is a big deal, especially if you're in the construction or building finance industries," said Thomas Galvin, regional research analyst at Colliers International brokerage firm in Ontario.

It might take a whopping nine years, Galvin said, depending on economic assumptions based on history.

"Who knows, it may be a lot sooner," he said. "If the economy recovers faster than we expect, and if the Inland Empire is able to attract businesses so people don't have to commute two hours to work, things might turn out better than it seems now."

No doubt, it's a tenant's market.

Historically speaking, it's also the Inland Empire office real-estate industry's first huge step back since it took off like a rocket in the early 2000s.

During the inflated housing boom, commercial builders couldn't stop building. The area was awash with outside big wigs scoping out our land and looking to stay ahead of the competition.
Then the housing market collapsed. Thousands of local layoffs in the financial industry have all but halted the raging real-estate machine. Cubical space isn't prime real-estate anymore.

"It's a perfect storm of things happening all at once," said CresaPartners tenant representative David Salazar. He manages the real-estate firm's Inland Empire business from its Ontario location.

"They were hoping the rents would be in the $2.50 to $2.75 (per-square-foot) range," Salazar said about commercial brokers who are trying to lease space. "Instead, they're around $2. Until inventory is absorbed, it'll probably hang right around there."

He's finding deals for clients.

"The most I've seen is one month per year, where you sign a five-year deal and get five months free," he said. "Twelve months ago, you couldn't find that."

Office developers eager to push inventory off their financial books are giving brokers the OK to make deals that would've been laughable a couple of years ago. Some are even offering a whole year's rent free if companies sign a 10-year lease.

"There's a lot more free rent being offered," said Mary Sullivan, independent contractor for Grubb & Ellis. "The concessions being offered are much more aggressive than 18 months ago."

Not only are companies taking their time shopping for space, some are having trouble getting financing. The credit crunch is making it harder for businesses to secure loans.

Sullivan said a 6- to 12-month office space inventory is considered healthy.

"We've got more inventory coming online," she said, "and the slowdown in absorption has come at the least desirable time."