Good news on the Inland office front

There are signs of life in the Inland Empire office market.

Office space vacancy in Riverside and San Bernardino counties dropped to 19.5 percent during the third quarter, according to data released this week by Colliers International.

That represented a 2.2 decline from the second quarter of this year and a 3.3 percent drop compared with the third quarter of 2012, according to Colliers.

The Inland region absorbed 443,000 square feet of office space during the third quarter, primarily because of two major transactions that closed during that time, said Robert G. Caudill, director of Colliers’ Orange County office specialty group, which covers the Inland region.

That was considerably more than the second quarter, when nearly 77,000 square feet of office space was absorbed, and a substantial turnaround year-to-year, when the Inland region lost 61,200 square feet, according to Colliers.

Rental rates were flat – an average of $1.65 a square foot, down one cent from the second quarter and the same as one year ago – and there was no construction of office buildings completed in the region during the quarter.

Those are all solid numbers, but until developers start moving dirt and putting steel in the ground for office projects the Inland office market won’t be on its way to recovery.

Development shouldn’t start until the Inland office vacancy rate drops to around 10 percent, according to Caudill.

“I’d say it’s a healthy market, but I would not say it’s in perfect health,” Caudill said. “It’s in a lot better shape than it has been, even one or two years ago.”

The Inland office market was stopped dead in its tracks when the recession hit in 2008, and its only now starting to come back, albeit slowly.

Several deals, including 250,000 square feet of space that Inland Empire Health Plan leased in Rancho Cucamonga, helped boost the second quarter numbers, Caudill said.

“That’s usually how it happens when you have a strong quarter, especially during a recovery,” Caudill said. “One or two large deals raises the market dramatically, especially in a place like the Inland Empire, which doesn’t have a lot of office space. But these numbers show the market is moving in the right direction.”