Q2 2012 San Bernardino/Riverside, California Office Market Trends

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Q2 2012 San Bernardino/Riverside, California Office Market Trends

If the completion of the 140,000-square-foot speculative Citrus Tower office building during the second quarter in Riverside—the first such completion since 2009—was a test of the market’s capacity for recovery in the current harsh climate, the results were less than spectacular. The project completed construction 75.0% vacant, according to Cushman & Wakefield. Reis puts net absorption for the quarter at 93,000 square feet. The first half 2012 total, however, was just 64,000 square feet. Still, recovery in this small, 20.3-million-square-foot general purpose, multi-tenant office market does appear to be under way, if at a gradual pace. July and August followed with combined net absorption of positive 64,000 square feet—and the year-end total metro wide is expected to roughly equal the volume of supply added by the new building, which will be 2012’s sole delivery of speculative space.

Another spec project, the 64,000-square-foot Truax Building in Temecula, the only project under way per the date of this report, may be providing another small test. Construction of the four-story building began in April. The ground floor is reserved for retail and restaurant space, according to the North County Times. Of the three floors devoted to office space, one had been leased and two remained available as of April. “Good progress is being made” on the leasing of the remaining space, according to the developer.

Vacancy, meanwhile, remains elevated. The rate for the second quarter was 24.9%, up 10 basis points for the period, down 50 year-over-year. The favorable net absorption in July and August shaved 30 additional points from the rate. Another small decline is expected for year-end.

Following three consecutive years of loss, rents stabilized in 2011, and a new growth trend is expected for 2012. At $21.34 psf and $17.07 psf, asking and effective averages for the second quarter were up 0.3% and 0.2% from the quarter before, following losses of similar proportion during the first quarter. A largely flat performance in July and August will be followed by modest increases over the remainder of the year. Marcus & Millichap’s third quarter 2012 report on the local market cites “slightly contracting concessions.”

Reis expects new supply and net absorption to strike a near-exact balance in 2012 as vacancy remains elevated and rent growth for the year all told runs at about 1.0%. Demand should pull ahead in 2013 as recovery advances. Rent growth rates should rise, with the effective side seeing the greater gains.