A Correction Could Be on Inland Empire's Horizon

Residential construction is still red hot. But some developers believe the market will stay strong for the next 12 to 18 months before a cool down, spawned by rising construction and land costs, ultimately slows down development.

By David Silva

Developers in the Inland Empire are simultaneously jumping for joy while furrowing their brows.

Business is thriving in every sector of the industry, with residential and office development doing particularly well. Some developers, however, express concern that the continued inflation of construction costs will soon begin to tell in the form of construction slowdown.

"Until three years ago, the office market in the region was dead as a door nail," said longtime Inland Empire-based economist John Husing. "Then, all of a sudden, it came alive as the development community here realized that vacancy rates were dropping, lease rates were rising and that it was getting harder and harder for companies to serve their big inland market.

"The residential market is such that we're building anywhere there's a piece of dirt."

Husing said a shortage of entitled land west of the 15 Freeway is pushing residential, retail, office and industrial development farther and farther inland.

Cities such as Corona, Riverside and Ontario-blessed with major transit access such as freeways, airports and rail hubs-are the largest benefactors of the boom.

Construction in Corona

The city of Corona, adjacent to the 15 and 91 freeways and between John Wayne and Ontario airports, is in the midst of an office development surge. About 1.5 million sq ft. of office projects are under construction, with another 1.5 million anticipated over the next few years, according to Nancy Martin, economic development manager for the city.

Family-owned Birtcher Development and Investments, based in Irvine, just completed Corona Crossroads, an 814,000-sq.-ft. office complex at Magnolia Avenue and Sherborn Street in Corona. The $42-million project features eight low-rise buildings ranging from 7,000 to 290,000 sq. ft. in size. All but one of the buildings has been sold.

Strata Realty of Corona is nearing completion of its Corona Spectrum Business Center, a 10-acre, 150,000-sq.-ft. office park on Old Temescal Road. The Spectrum's 14 office buildings range in size from 4,000 to 19,000 sq. ft. The company is also building and leasing the 6.7-acre, 107,240-sq.-ft. Princeland Plaza, a master-planned project featuring a pair of three-story, 53,600-sq.-ft. office buildings at Rincon and Joy streets in Corona.

Just down the road from Princeland at Harrison Street, Newport Beach-based Shaw Properties is demolishing structures on a former packing plant site to make room for the Citrus Woods Business Center, a 170,154-sq.-ft., 29-building, office and industrial park. About 57,901 sq. ft. of the center will be devoted to office space and 98,773 sq. ft. to industrial use.

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The project, valued at $32 million, should be completed by the middle of 2006. KPRS Construction of Brea is the general contractor.

Dallas-based Trammell Crow Co. is expected to complete the Sierra Del Oro Business Center by the end of the first quarter of 2006. Located in the hills of West Corona, the center comprises 11 one- and two-story buildings ranging from 5,000 to 8,500 sq. ft.

Martin traces the roots of the ongoing office boom back to a Corona City Council directive set in the late 1990s.

"The council put forward the position that we needed to concentrate on office development as our next base because most of our residents here are in the professional industries, and we felt this was one way to enhance their quality of life by getting them off the freeway," she said.

"We concentrated on developers to appraise our business climate, and we concentrated on attracting the end users of the office space. We've been so successful that demand has now far outstripped our supply."

In nearby Riverside, Turner Development Corp. of Newport Beach is wrapping up the third phase of its six-phase Turner Riverwalk. When it reaches its anticipated 2009 build-out date, the $100-million, 73-acre mixed-use development on Pierce Street near the 91 Freeway will exceed 1 million sq. ft. of office, industrial and retail space.

That would make it one of the largest master-planned business parks in the Inland Empire, according to the city of Riverside's Economic Development Division. Fullmer Construction of Ontario is the general contractor for the project.

Turner Riverwalk will ultimately comprise 60 buildings, 500,000 sq. ft. of which will be devoted to office use, 400,000 sq. ft. to industrial and 100,000 sq. ft. to retail.

Michael Kendall, vice president of Turner Development, cited skyrocketing construction costs and a real estate market out of kilter with reality as the top challenge he sees facing Inland development.

"It's going up across the board," he said. "Construction costs are rising. Land costs are outpacing lease rates. The fees that the cities are charging for infrastructure like traffic improvements and environmental issues are rising. All those end up adding a tremendous amount of cost to the bottom line.

"So far, the market has been keeping up with costs. But at some point, I believe the market will cool down, not be able to keep up with the costs and ultimately slow down development. I think for the next 12 or 18 months, there's certainly enough steam to the market from existing product to keep things going, but at some point, something has to give."

Brandon Birtcher, owner and president of Birtcher Development, also pointed to soaring land costs as one of his top concerns. He predicted rising interest rates would eventually save the day.

"A prudent developer will underwrite his project to provide market returns at current lease rates, and the current land values are forcing lease rates to rise," Birtcher said. "Lease rates haven't met the level that it takes to justify current land values.

Landowners need to adjust their expectations to reflect the reality of current lease rates. As we see interest rates rise, land sales will begin to cool and companies will be more inclined to lease, and therefore land values will begin to reflect a more realistic price."

New Life for Old Mall?

The fickle fortunes of the market can be seen in the proposed reuse of the old Carousel Mall on West Fifth and N streets in San Bernardino. The mall was once a money machine for the region, but it has been gasping for years.

Now, Street-Manchester, a partnership between Irvine businessmen Harold Street and Fred Stemmler, has secured a purchase agreement with some of the mall's remaining tenants to buy the 44-acre property on which the mall sits. According to Colin Strange, a project manager with San Bernardino's Economic Development Agency, Street-Manchester wants to tear down the Carousel, reconfigure the old street grid into smaller city blocks and build a massive mixed-use center with 150,000 sq. ft. of retail at street level, 300,000 sq. ft. of office space and an as-yet undetermined number of town homes and condominiums.

The partnership has yet to purchase the property and has until Jan. 20 to exercise its option to do so.

"We'd love to see it plunked down there," Strange said. "From my rough estimate, I can envision $400 million worth of investment taking place there. We're just waiting to see if the purchasing goes through, and, hopefully, it will."

Glendale-based SE Corp. is developing Dos Lagos, a master-planned mixed-use community under construction in Corona along the 15 Freeway just south of the 91.

At build-out, the project will include 750 residential units, 500,000 sq. ft. of high-end retail and 500,000 sq. ft. of office space, two hotels, a conference center and a golf course. The project is estimated to cost $100 million.

Two Big Projects in Ontario

In Ontario, Panattoni Development Co. of Sacramento is redeveloping a 94-acre area adjacent to the Ontario Mills Mall into a project called Piemonte-a $200 million mixed-use residential/retail/restaurant complex described as an urban village akin to Forest City Enterprise's Victoria Gardens in Rancho Cucamonga.

The 1-million-sq.-ft. development will feature 806 residential units, 769 multifamily residences, an 11,000-seat sports and entertainment arena, 400,000 sq. ft. of retail space, 550,000 sq. ft. of office space and a 200-plus room high-end hotel and restaurant.

Panattoni expects to break ground on the project in March.

Jeff Phelan, a senior partner for Panattoni Development in Southern California, said construction costs-or, rather, the uncertainty of them-are the major concern of his firm.

"The biggest question for us today is what costs will be tomorrow because of the impact of inflation and Hurricane Katrina, once construction begins in the Southeast," he said. "The uncertainty is making developers nervous."

Los Angeles' J.H. Snyder Co. has joined with Ontario to redevelop the city's downtown. The $200 million Ontario Town Center, planned for a 12-square-block area of the city center, will feature 750 rental and for-sale residential units, 100,000 sq. ft. of ground-floor retail and restaurants, 200,000 sq. ft. of office and academic space and a landscaped central plaza.

It will incorporate the existing city hall, a new senior center and the city's public library. Scheduled for completion late this year, the project will be designed by The Jerde Partnership of Venice, Calif.

In the Inland Empire's red-hot residential development sector, San Diego-based Corky McMillin Cos. held a grand opening in November for the 59-single-family-home Blackstone neighborhood phase of its upscale Morgan Hill community in Temecula.

At build-out, Morgan Hill will consist of 1,121 deluxe homes amid such luxuries as a 10,000-sq.-ft. community center with swimming and lap pools, spa, gym, sauna and nearby golf club.

More Homes in Rancho Cucamonga

Rancho Cucamonga's Victoria Gardens shopping community should soon get a lot more foot traffic once Texas-based Fairfield Residential completes two major residential developments next to the mega-complex.

The company is building the 270-unit, 261,000-sq.-ft. Chambray at Victoria Arbors and the 319-unit, 302,600-sq.-ft. Meritage at Victoria Arbors.

Construction of both communities-part of the city's Victoria Arbors master plan to complement its retail development with economically stratified housing-began in May 2004 and is expected to finish in April.

"Victoria Gardens is a lifestyle center, and having these residential units so close to the mall is good in terms of services and employment for potential residents," said Linda Daniels, Rancho Cucamonga redevelopment director. "It's also good for the mall."