With the economy still mired in recession and corporate profits mostly driven from reducing expenses, the Inland Southern California industrial market continued to struggle in the third quarter.

The vacancy rate in the two-county region finished the quarter at 12.08 percent, which is higher than the 10.06 of a year ago. The lowest vacancy rate in the area was found in the Western region, coming in at 7.71 percent, according to a quarterly report by Voit Real Estate Services.

Overall, the region continues to suffer from increasing vacancy, tenant delinquencies, scare financing, economic volatility and the gap between "ask" and "bid" pricing between buyers and sellers. In its third quarter report, Voit found that gap appears to be diminishing, which was evident by some of the large sales that occurred this year.

Another challenge facing the industrial market is the overall lack of tenant demand, despite several large sales and leasing transactions completed in the Western region during the third quarter.

"The West Inland Empire has always been stronger than the rest of the region," said Kurt Strasman, managing director with Voit Real Estate Services in Anaheim. "The West is the hub of activity. That has all been price driven right now. The East Inland Empire has deep-seeded problems, including over development and a lack of tenant demand."

The slow economic environment is forcing tenant contractions, consolidations and failures, which in turn has put upward pressure on vacancy and availability rates. This has led many tenants to request rent relief from landlords, and owners renegotiating loan terms with lenders, the report found.

The average amount of leasing per quarter over the past nine quarters was 6.5 million square feet. Sales activity showed a decrease over last quarter, posting 1.6 million square feet of activity compared to the second quarter's 2.9 million square feet.

At the end of the third quarter the average asking lease rate was 35 cents per square foot, an 18.6 percent decline from 43 cents in the third quarter of 2008 and two cents lower than last quarter.

Owners of industrial properties have been chasing deals by dropping their sale prices and lease rates to attract potential tenants, many of whom are looking to make a lateral move, Strasman said.

"Prices are down significantly and that should continue for the next 12 months," Strasman told The Business Press.

In the firm's latest quarterly report, Rialto had the region's highest vacancy rate at 27.74 percent, with 4.96 million square feet of industrial space for sale or lease. Other areas with high vacancy rates were all located in the Eastern region of the Inland Empire and include Beaumont, 24.27 percent, Loma Linda, 24.22 percent, Moreno Valley, 22.57 percent, and San Bernardino at 23.27 percent.

On the opposite end, Highland had the lowest vacancy rate at 0.21 percent. But Jerry J. Holder Jr., Voit's vice president of market research and author of the third quarter report, noted that the submarket had a total of 8,700 square feet of available space out of a relatively small total of 578,702 square feet of industrial space.

The region's largest submarket is Ontario with 1,497 industrial buildings and a total of 98.02 million square feet. At the end of the third quarter, Ontario had a vacancy rate of 9.85 percent with 14.2 million square feet of industrial space available for lease or sale, the report found.

ProLogis reports leasing activity

Among the most active companies in the third quarter was ProLogis, which completed leases totaling more than 1.5 million square feet in the two-county region.

In September, the Denver-based owner of distribution facilities leased 215,000 square feet of space at it's ProLogis Park Ontario Airport to Golden State Container. Located off Interstate 15 between Interstates 10 and Highway 60, the industrial park comprises approximately 1.9 million square feet in six buildings.

Terms of the deal were not released. Tyson Chave, vice president and market officer for ProLogis. said Golden State and its related companies now lease a total of 324,000 square feet of ProLogis distribution space in the United States and Mexico.

The company also agreed to terms with Continental Tire North America Inc. to lease 498,000 square feet of a recently completed distribution center at the 600,000-square-foot ProLogis Park in Redlands. CNTA will use the space to store and distribute tires to its customers throughout the region, ProLogis said in a statement,

ProLogis Park Redlands comprises seven buildings for a total of 3.1 million square feet, Other lease agreements include 606,925 square feet in Mira Loma to Act Fulfillment and 577,905 square feet of industrial space in Fontana to Ozburn Hessey.

Brokers with ProLogis were unavailable to comment on the transactions. But the company reported on Oct. 22 better than expected third quarter earnings from operations and noted a stabilization in the industrial market.

"Looking ahead, we see a global market that's beginning to show signs of stability," said Walter Rakowich, ProLogis chief executive in a conference call with analysts. "Perhaps growth and expansion will come sooner than we thought. We'll see. However, we will remain highly focused on three things, continued lease-up of our development portfolio and monetization of our land bank, further staggering and extending our debt maturities and addressing property fund issues as appropriate."

ProLogis reported third quarter funds from operations of $65.2 million, or 14 cents per share, from $158 million, or 59 cents per share from a year earlier. For properties owned at least a year, net operating income, which reflects cash flow from properties, fell 4.3 percent.

In its quarterly earnings report, ProLogis rents worldwide were down 14.7 percent compared to 12.6 percent in the second quarter, while occupancy at its non-development properties rose slightly to 92.7 percent from 92.5 percent. The company also said its de-leveraging plan was essentially complete. ProLogis issued $350 million of senior notes during the quarter, extended a line of credit to 2012, and issued new stock, raising $325 million.

"Our work to stabilize the company is the substantially complete, and we have shifted our focus to positioning for long-term growth," Rakowich said. "And while we anticipate there will be pressure on rents for the foreseeable future, we're cautiously optimistic about market fundamentals overall and the opportunities we see to convert non-income producing assets into cash flow for our shareholders."

Currently, ProLogis owns and operates a total of 4.16 million square feet of industrial property in the two-county region, according to listings on the firm's Web site.

While, ProLogis received most of the attention in third quarter, the region experienced a number of other significant sales and lease deals. For example, Southern California Logistics Centre in Victorville continued to attract large companies to the former George Air Force Base.

In October, Stirling Capital Investments announced a 25,146-square-foot lease with Pacific Aviation Group. The company took over the space at 18499 Phantom, which is part of the recently completed Global Access Business Centre, a 2,500-acre commercial and industrial complex.

Terms of the deal were not disclosed. In a statement, Brian Parno, vice president of Stirling Capital Investments, said the firm continues to receive "a lot of inquiries" from interested tenants.

Also in the third quarter, Plastipak Packaging Inc. signed a 231,185-square-foot lease at Southern California Logistics Centre. The company manufactures and distributes plastic bottles at the facility that features 112 dock high locading doors, 147 truck trailer parking spaces and a 32-foot roof.

The building also received a LEED gold certification from the U.S. Green Building Council for its sustainable features which include: reduced-flow electronic valve restroom fixtures and drought-tolerant landscaping to reduce water use by 30 percent on indoor plumbing and 60 percent on landscaping. Energy savings strategies include: three percent skylights with daylight harvesting, improved building envelope and energy efficient HVAC and lighting equipment, the company said.

In terms of sales activity, the region had three significant deals in the third quarter, with the largest being Bally Development's $18.6 million deal to acquire the 290,650-square-foot Phelan Logistics Center at 15889 Slover Ave. The 12-acre property operates as the primary distribution center on the West Coast for Maxzone Auto Parts

Other sales completed during the quarter were Bollibokka Land Company's $14.7 million purchase of eight properties, or 112,621 square feet, at 13949 Ramona Ave. in Chino and Myers Power Products $14.6 million purchase of a 221,921-square-foot building at 2950 E. Philadelphia St. in Ontario.

Despite these examples of robust leasing and sales activity, analysts say the industrial market has not reached the bottom of its current down cycle, but on the positive side the region has begun to start experiencing a decrease in the amount of available space being added per quarter as well as a moderate increase in sales activity, the report found.

"Lease rates are expected to remain soft for the foreseeable future, and concessions should continue to increase in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances to incentivize tenants to act now," Holdner wrote in his report. "We should see an increase in leasing activity as 2009 comes to an end from pent up demand. Once financial markets correct themselves and consumer confidence stabilizes, then the industrial market will turn positive."