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    Kendall: National Interest Rising in County Office Market
    March 9, 2015

    GlobeSt.com

    ONTARIO, CA—Optimism is high in San Bernardino County—and investors are playing a role. The region is beating its neighbors in job creation over the past year (2.2% growth, vs. 2.0% for Orange County and 1.3% L.A.). And statewide it saw the highest levels of new business creation (two-thirds of all businesses in 2012 and 2013) and is home to the metros with the largest gain of 25- to 34-year-old college graduates between 2011 and 2013.

    All these point to momentum when the county hosts its “State of the County” event on April 15 (full information can be found by clicking here). To get an idea for how positive the outlook is, GlobeSt.com spoke exclusively with Michael Kendall, panelist on the “Game Changing Commercial Real Estate Opportunities Now and for the Future in San Bernardino County” session taking place at the event. The SVP of investment properties for CBRE, Capital Markets, gave his take on current investor interest in the office market and how the County fits in, both regionally and nationally.

    GlobeSt.com: What is driving the majority of activity?

    Michael Kendall: A couple of factors are driving the increase in activity. First, the fundamentals of the office market are stronger than they have been since the recession and they are continuing to improve. One of the most notable changes in the past year is the reduction of large blocks of vacant space due to strong absorption. Vacancy rates have dropped significantly in the past 12 months, particularly in the Class A market in Ontario and Rancho Cucamonga. We’re also seeing a commensurate rise in lease rates. Another factor driving the increase in investor interest in office is the more attractive yields when compared to the coastal markets - investors are chasing yields.

    GlobeSt.com: What is the investor profile?

    Kendall: The investor profile is evolving. In 2013 and 2014, the predominant buyer of office in the Inland Empire was the professional real estate operator, both local and regional players with either private or aggressive institutional capital. Midway through 2014, this started to change. We are now seeing some national operators and larger institutional investors considering this market. This trend is very typical. The first groups to jump back into the market after a large correction are very entrepreneurial and nimble and aren't intimidated by risk, as long as they feel they are being fairly compensated for the risk. The early movers typically precede the improving fundamentals. Then, as the market starts to show tangible signs of improvement, the larger players with the lower cost (and more risk averse) capital start to show up.

    Another new trend playing out in a big way in the coastal markets and just starting to emerge in the Inland Empire is foreign capital. Initially, foreign capital focused on trophy office and hospitality properties in gateway cities like New York, San Francisco and Los Angeles. Now, like other investors, we are seeing foreign capital broaden their targets and start to consider the highest quality Class A properties in the Inland Empire.

    GlobeSt.com: What is the greatest opportunity in the office market today in the county?

    Kendall: I think it is important to point out that the significant improvement we have seen in the office market in the past 12 months has happened without a large contribution from the housing sector. Yes, new home building has started to return. But, it is still a fraction of where it was in 2005 and 2006. As home building increases in the Inland Empire, as we all know it will, the office market will benefit from the jobs created by that growth.

    GlobeSt.com: What are some of the standout transactions of late?

    Kendall: Two current transactions highlight the breadth of investor interest in San Bernardino County.

    First, Tri City Corporate Center in San Bernardino is the largest master planned office park in the entire Inland Empire, at one million square feet. Recent relocations and down-sizing by major tenants pushed occupancy to 72%. Because of the increased vacancy and sheer size of the park, this became a large scale value-add opportunity that attracted widespread attention from the investor community. After a heated marketing process, a buyer was selected and the property is officially in escrow with a sophisticated national operator (new to the Inland Empire office market) paired with an institutional capital partner.

    Another standout transaction is Ontario Airport Tower, located at 2855 E. Guasti Road, located on Interstate 10 at the entrance to Ontario Airport. This is one of the newest and arguably the nicest office building in the entire Inland Empire market. It was 94% leased when it was brought to the market and it attracted significant interest across the investor spectrum. It is in escrow and due to close shortly. This will be by far the highest price per square foot paid since the start of the recession in 2008.

    GlobeSt.com: How do you compare the County office market to the competing regions? What will drive more office investment and leasing over the next few years?

    Kendall: The Inland Empire office market is a suburban market, and not considered a core market like Downtown LA, West Los Angeles and the Orange County Airport markets. As these core markets continue to thrive and offer dramatically lower yields, and the market fundamentals in San Bernardino County continue to strengthen, more and more investors will consider this market.

    The San Bernardino County State of the County “Momentum is Building in 2015” will be a forum to share how the work of the Countywide Vision is generating positive momentum across important areas of San Bernardino County’s economy including: healthcare, education, business, global access, tourism and government.  The event will be held Wednesday, April 15 starting at 4:30 pm at the Citizens Business Bank Arena in Ontario. The NAIOP Inland Empire panel will take place prior at 3:30 pm. More than 1,000 business, community, and government leaders will be in attendance. For tickets, go to www.sbcountyadvantage.com.
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