Industrial Real Estate
LAKE ELSINORE SECTION 6 INDUSTRIAL REAL ESTATE
In 2004, Lake Elsinore is at a crossroads in its 116 year history. Since incorporation in 1888, the community’s economy and way of life have largely centered around tourism. Its 3,000 surface acre recreational lake has made it a mecca for swimming, fishing and water sports. Sky diving and parasailing have made the aerial view of the city famous. The nearby Cleveland National Forest is one of Southern California’ s principal outdoor destinations. However, things are changing. With the completion of the I-15 freeway through to San Diego, the Lake Elsinore Outlet Mall has added a flow of outside dollars into the city’s coffers since 1992. At the same time, undeveloped land has increasingly disappeared in Southern California’s coastal counties driving up their industrial real estate prices. For instance, in 2003, aging industrial space leased for $0.43-$0.63 per square foot per month in the various sub-markets of Los Angeles, Orange and San Diego counties. This was well above the $0.35 per square foot average for new space in the inland area (Exhibit 85). As a result, many industrial firms have been either lured or forced inland. Thus in 2003, 28.5 million square feet of gross space was leased to industrial firms in the Inland Empire, despite the national manufacturing recession (Exhibit 77). The total inventory of industrial space in the Inland Empire is now at 284 million square feet. In Southern California, this is second only to Los Angeles County’s 929 million square feet (Exhibit 78). Development Headed For Lake Elsinore From North and South. For Lake Elsinore, these events mean that industrial development pressures are moving towards it along the Route 91/I-15 freeway corridor from Orange County and up the I-15 corridor from San Diego County. In the 2000-2003 period, Corona (20 miles north) added 1.4 million square feet of industrial space to reach 22.3 million square feet. However, that city is now out of undeveloped industrially zoned land. In the same three year time span, Temecula (16 miles south) added 282,881 square feet of space to reach 11.9 million square feet. As industrial growth is relatively new to that community, it still has ample room to grow (Exhibits 79-80). Both of these cities were relatively short of space, with the vacancy rates at 8.7% in Corona and 7.2% in Temecula. Lake Elsinore is beginning to see some activity, primarily coming from the built-out Orange County and Corona markets. The recent development of a 600,000 square foot industrial facility in the city shows is indicative of this trend. Development Pressures Will Continue. The Inland Empire’s strong industrial development pressures are not going to evaporate. In 1991, the region’s industrial space vacancy rate was 24%. Once the recession started ending in 1993, a large number of firms moved to the inland region to take advantage of its newer space and lower costs. As a result, the Inland Empire’s vacancy rate plunged to 8% in 1995. Despite building millions of square feet of space since that time, the rate was down to 6.6% in 3rd quarter 2003 (Exhibit 81).
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Industrial Real Estate
In September 2003, the market’s difficulty is seen by the fact that only 18.2 million square feet of industrial space was available in the Inland Empire (Exhibit 82). That is less than the 27.4 million gross square feet absorbed in just the past 4-quarters. Clearly, more space will be needed. In Riverside’s I-15 Corridor, Corona’s lack of land for industrial projects will force some of these projects towards Lake Elsinore. Already, the high demand and low supply of sites in Corona has made it the second most expensive industrial location in the Inland Empire (Exhibit 86). As firms move south, zoning will confine them to the eastern side of the I-15 freeway down Temescal Canyon. The move will take time, but the force is inexorable and the canyon is narrow. As the growth approaches Lake Elsinore, manufacturers will find that the Temescal Elsinore Valley Regional Interceptor line (TEVRI) is available to transmit their non-toxic waste water directly to the Pacific Ocean. It will thus be possible for companies in heavy water-using sectors, like computer chip manufacturing, to locate within the city’s boundaries. Riverside County’s I-15 Development. In tracking the 1,110 firms that have changed location to expand in the Inland Empire between 1994-October 2003, it should be noted that 166 of these companies located in the Corona (127), Lake Elsinore (3) or the Temecula Valley (36) along Riverside County’s I-15 corridor. Their profile was quite different from firms moving within the Inland Empire as a whole (Exhibit 83-84). Of the area’s firms, 79.5% were manufacturers, against 52.5% for the Inland Empire generally. The corridor’s manufacturers were larger, averaging 76.3 workers versus 68.5 for the entire region, and they used less space per worker: 840 square feet compared to 1,040 square feet. In Riverside’s I-15 corridor, only 14.5% of the expanding firms were distributors versus 35.5% in the Inland Empire generally. The corridor’s distributors were smaller, averaging 40.7 workers versus 104.5 in the inland region, and they used less square feet per worker: 1,724 compared to 2,072. Meanwhile, a larger share of the firms expanding along the corridor came from coastal counties than for the Inland Empire generally: 38.0% versus 23.1%. Firms that were either new or new to Southern California were 22.9% of the corridor’s growth versus 37.0% for the region. The major similarity is the fact that roughly 39% of the corridor’s and the region’s growth came from firms moving within the Inland Empire. Summary. As Lake Elsinore transitions from an independent tourist based economy to one caught up in Southern California’s major development trends, the stages it will move through are characteristic of the Southland’s economic history. First, residential developers move to an area, build houses and bring population growth. Later, industrial developers come and bring jobs. The city is in the housing stage. It is entering the horizon of the industrial stage. Lake Elsinore’s economy is currently made up of very small firms with 66.9% of its companies having 10 or fewer employees (Exhibit 87). This is changing as the figure was 72.8% in 1999. Of its 20 largest firms: 10 were in the retail sector, 8 were involved with construction, one each were involved in tourism and miscellaneous services (Exhibit 88). In the short term, an economic strategy based around encouraging home grown firms to expand is the city’s most viable approach to development. However, it should be recognized that the time is approaching when the powerful force of the outward expansion of Southern California’s industrial market will impact the city. As indicated, the first hints of this are evident now with 600,000 square feet of industrial space now in the planning process, plus the arrival of Quality Form Packaging with about new 75 jobs. Over the next five years, interest in Lake Elsinore will build. Looking forward, in the period 2006-2010, the city should be ready to become a player in the Inland Empire’s industrial development story.
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Industrial Real Estate
Exhibit 77.-Industrial Space Gross Absorption Inland Empire, 1991-2004 (moving 4-quarter total)
50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Grubb & Ellis & Economics & Politics, Inc.
Total Industrial Space Available . . .
• The Inland Empire industrial real estate market surrounding the city of Lake Elsinore is among the strongest in the United States. Industrial space absorption by manufacturers and distributors soared from 1998 to 2001 (Exhibit 77). For the 4-quarters ended at 3rd quarter 2001, gross absorption was a record 48.0 million square feet. Activity has slowed due to national and state difficulties in manufacturing and distribution. Still, for all of 2003, some 28.5 million square feet were absorbed. (Note: each point on Exhibit 77 shows the amount of space taken in the 4-quarters ended at that point to smooth out quarterly fluctuations.) The power of the Inland Empire industrial market is seen now that the area has 284 million square feet of industrial space. That is more than Orange County (187 million square feet). It is also 30.5% of the total in Los Angeles County (930 million square feet). The inland area has been building space aggressively since 1985 and is approaching one-third the space in Los Angeles County, an area that has been building since World War II (Exhibit 78).
Exhibit 78.-Inland Empire Industrial Space vs. Los Angeles County Existing & Under Construction, 2003
929,892,170
•
30.5%
283,700,722 186,536,085
Los Angeles County
Inland Empire
Orange County
Inland Ratio to L.A. County
Source: Grubb & Ellis
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Industrial Real Estate
Exhibit 79.-Industrial Space Market, 2000-2003 South I-15 Corridor: Corona
22,334,968 20,889,930
6.9% 1,445,038
Inventory: 2000 Inventory: 2003 2000-2003: Growth .
Source: Grubb & Ellis
8.7%
2000-2003 Growth Rate
Vacancy Rate: 2003
Industrial Market North & South of Lake Elsinore . . .
• Economic development is approaching Lake Elsinore from both the north and south along the I-15 corridor. In the north, Corona added 1.4 million square feet of industrial space from 2000-2003, bringing its total to 22.3 million square feet. Of this 8.7% was either vacant or occupied and becoming available in 3rd quarter 2003, for a vacancy rate of 8.7% (Exhibit 79). Importantly, Corona is nearly out of industrial land. New development is thus moving south down the eastern side of the narrow I-15 corridor toward Lake Elsinore. Lack of space in Orange County is driving this market. In the south, Temecula added 282,881 square feet of industrial space from 2000-2003, bringing its total to 11.9 million square feet in 3rd quarter 2003. Of this, 7.2% was either vacant space or occupied but becoming available (Exhibit 80). Temecula’s industrial market is still relatively small and has room to grow. In part, it is expanding in response to conditions in the San Diego market. In part, its growth is the result of firms making quality of life decisions to locate in the area. Lake Elsinore is less likely to see firms migrate to it from this direction in the near future.
Exhibit 80.-Industrial Space Market, 2000-2003 South I-15 Corridor: Temecula Valley
• •
•
11,580,789
11,863,670
7.2% 282,881 Inventory: 2000 Inventory: 2003 2000-2003: Growth. 2.4% 2000-2003 Growth Rate Vacancy Rate: 2003
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Industrial Real Estate
Exhibit 81.-Industrial Space Availability Rate
Inland Empire, 1990-2003
26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: Grubb & Ellis
Industrial Vacancy Rate & Space Availability. . .
• The accelerating migration of manufacturing & distribution firms to the Inland Empire market has caused the area’s industrial space vacancy rate to plummet. Grubb & Ellis estimates that the region’s industrial vacancy rate fell from 23% in 1991 to 8% in 1995. Since 1995 and despite a prodigious amount of new construction, the rate has slowly fallen to 6.6% in third quarter 2003 (Exhibit 81). In the process, industrially zoned land is becoming scarce in traditional hot spots like Corona, Chino, Mira Loma and Ontario. In third quarter 2003, the total of available space in the Inland Empire market was only 18.2 million square feet (Exhibit 82). That is far less than the 27.4 million square feet of gross space absorbed the prior 12-months. Construction is thus moving deeper into the inland region. In Riverside County’s I-15 corridor, this will force some of the market south towards Lake Elsinore.
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Exhibit 82.-Industrial Space Availability By Market Inland Empire, 3rd Quarter 2003
Ontario/Mira Loma Chino Corona Rancho Cucamonga Fontana Riverside San Bdno/Redlands Temecula Colton/Rialto Montclair/Upland Moreno Valley/Perris
6,826,674 2,008,584 1,936,576 1,817,557 1,728,334 1,440,671 1,118,070 856,862 230,737 149,965 100,882
Source: Grubb & Ellis
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Exhibit 83.-Major Firms Leasing Space For Expansion, Lake Elsinore, Corona, Temecula, Murrieta, 1994-Oct 2003 Firms Percent Workers Percent Sector Jobs
Manufacturing Distribution Service Govt. Agencies Total 132 24 10 0 166 Firms 63 38 101 65 79.5% 14.5% 6.0% 0.0% 100.0% Percent 38.0% 22.9% 60.8% 39.2% Manufacturing Distribution Service Govt. Agencies Total 10,077 977 444 0 11,497 Square Feet 8,461,245 1,684,017 201,560 0 87.6% 8.5% 3.9% 0.0% 100.0% Percent 81.8% 16.3% 1.9% 0.0%
Workers/Firm 76.3 40.7 44.4 NA 69.3 Feet/Worker 840 1,724 454 NA 900
Source
Migrate from LA/OR New Growth New To Inland Empire Expand Within I. Emp.
Other
Manufacturing Distribution Service Govt. Agencies
166 100.0% Total 10,346,822 100.0% Total Source: Coldwell Banker, CB Commercial, Grubb & Ellis, Cushman Wakefield, Lee & Assoc., Collins Fuller, IEEP
Characteristics Of Firms . . .
• Lake Elsinore’s industrial market will expand as firms like Quality Foam Packaging choose to locate south of Corona or north of Temecula. Riverside County’s I-15 market area has seen 166 major firms move to expand within it since January 1994 (Exhibit 83). Of these, 127 were in Corona, 36 in Temecula, five in Norco and three in Lake Elsinore. These firms have a different profile than those expanding in the Inland Empire as a whole. In Riverside’s I-15 Corridor, 79.5% of firms that move to expand were manufacturers, against 52.5% for the Inland Empire generally (Exhibit 84). The area’s manufacturers were larger, averaging 76.3 workers versus 68.5 for the entire region, and they used less square feet of space per worker: 840 compared to 1,040. In Riverside’s I-15 Corridor, only 14.5% of the expanding firms were distributors. It was 35.5% in the Inland Empire generally. The area’s distributors were smaller, averaging 40.7 workers versus 104.5 in the inland region, and they used less square feet per worker: 1,724 compared to 2,072. In Riverside County’s I-15 area, a larger share of the expanding firms came from coastal counties than for the Inland Empire generally: 38.0% versus 23.1%. Firms that were either new or new to Southern California were 22.9% of corridor’s growth versus 37.0% for the region. The major similarity is the fact that roughly 39% of the corridor and the region’s growth came from firms moving within the Inland Empire.
•
•
•
Sector
Manufacturing Distribution Service Govt. Agencies TOTAL
Exhibit 84.-Major Firms Leasing Space For Expansion, Inland Empire, 1994-Oct 2003 Firms Percent Workers Percent Jobs
583 394 121 12 1,110 Firms 256 411 667 443 52.5% 35.5% 10.9% 1.1% 100.0% Percent 23.1% 37.0% 60.1% 39.9% Manufacturing Distribution Service Govt. Agencies TOTAL 39,940 41,160 13,150 3,222 97,472 Square Feet 41,542,393 85,279,631 3,295,052 1,642,200 41.0% 42.2% 13.5% 3.3% 100.0% Percent 31.5% 64.7% 2.5% 1.2%
Workers/Firm 68.5 104.5 108.7 268.5 87.8 Feet/Worker 1,040 2,072 251 510 1,352
Source
Migrate from LA/OR New Growth New To Inl. Empire Expand Locally
Other
Manufacturing Distribution Service Govt. Agencies
1,110 100.0% TOTAL 131,759,276 100.0% TOTAL Source: Coldwell Banker, CB Commercial, Grubb & Ellis, Cushman Wakefield, Lee & Assoc., Collins Fuller, IEEP
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Industrial Real Estate
Exhibit 85.-Industrial Space Costs, Southern California Asking Lease Rates (nnn), 250,000 Square Feet, September 2003
Orange-South L.A. - North Orange-Airport Orange-West Orange-North L.A. - Mid Cities L.A. - South Bay LA-Central San Gabriel Vly Inland Empire $378,000 $372,000 $366,000 $342,000 $324,000 $294,000 $276,000 $258,000 $258,000 $212,000 Source: Grubb & Ellis
Industrial Lease Rates, 2003. . .
• Industrial firms are migrating to the Inland Empire as its facilities are newer and its lease costs are lower. In 3rd quarter 2003, inland county industrial leases average $0.35 per square foot per month or $212,000 a year for a 50,000 square foot facility (Exhibit 85). In Southern California’s coastal counties lease rates are much higher. A 50,000 square foot building would leases for $258,000 in the San Gabriel Valley, Los Angeles County’s least expensive market ($0.43 sq. ft./mo.), a $46,000 or 21.7% premium (Exhibit 85). The same space would cost $324,000 in northern Orange County, that area’s cheapest market ($0.54 sq. ft./mo.), a $112,000 or 52.8% premium. Lake Elsinore’s relatively inexpensive industrial property is an incentive for Inland Empire firms to migrate its way. This is particularly true since the nearest markets are two of the three most expensive in the inland region: Temecula ($0.47 sq. ft./mo.) and Corona ($0.41 sq. ft./mo.). Due to heavy demand, and limited supply, lease rates in both of these markets are well above the Inland Empire’s average of $0.35 per square foot a month (Exhibit 86).
Exhibit 86.-Industrial Space, Asking Lease Rates Inland Empire, Sub-Markets, March 2003
Montclair & Upland Temecula Corona Riverside Chino Rancho Cucamonga Perris & Moreno Valley Inland Empire Ontario Mira Loma Fontana Redlands & San Bdno Colton & Rialto Source: Grubb & Ellis $0.41 $0.40 $0.40 $0.40 $0.37 $0.36 $0.34 $0.34 $0.33 $0.33 $0.32 $0.48 $0.47
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Industrial Real Estate
Exhibit 87-Distribution of Firms Lake Elsinore, 2002
101-200 13 2.4% 201 & Up 4 0.7%
51-100 25 4.5% 26-50 44 8.0% 16-25 56 10.2% 11-15 40 7.3% 6-10 111 20.2%
0-5 257 46.7%
Source: CA Employment Development Department
Lake Elsinore Firms . . .
• Lake Elsinore has an economy made up of small firms. This will be the basis for local employment until the full force of development arrives from the Corona area. In 1999, 46.7% of companies had 1-5 workers and 20.2% had 6-10. Together, 66.9% of the city’s firms were in these two groups (Exhibit 87). Of Lake Elsinore’s twenty largest firms in 2002: 10 were in the retail sector, 8 were involved with construction, one each were involved in tourism and miscellaneous services (Exhibit 88).
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Exhibit 88.-Largest Employers, City of Lake Elsinore, 2002
Name Size 1 Lake Elsinore Outlet Mall 200-400 2 Walmart 200-400 3 Brookstone Construction 200-400 4 Albertsons 100-200 5 Bourne Development 100-200 6 Elsinore Construction 100-200 7 Sahara Dunes Casino 100-200 8 Stater Brothers Markets 100-200 9 Silverado Concrete 100-200 10 Lake Chevrolet 100-200 11 Vons Markets 100-200 12 Elsinore Ready Mix 50-100 13 Denny's Restaurant 50-100 14 Coco's Restaurant 50-100 15 Don Jose Restaurant 50-100 16 Hillstrom Contracting 50-100 17 Protec Mechanical 50-100 18 Right-Way Septic Tank 50-100 19 Deleo Clay Tile 50-100 20 In & Out Burger 50-100 Source: Lake Elsinore Chamber of Commerce, City of Lake Elsinore Product or Service Retail: Clothing Retail: Department Construction: Contractor Retail: Grocery Construction: Roofing & Siding Construction: Roofing & Siding Tourism: Hotels & motel Retail: Grocery Construction: Structural Clay Products Retail: Automotive Retail: Grocery Construction: Concrete Retail: Restaurant Retail: Restaurant Retail: Restaurant Construction: Contractor Construction: Contractor Misc. Service: Equipment Leasing Construction: Structural Clay Products Retail: Restaurant
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