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Shopping Centers Today -> September 2002
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RETAIL BOOMS AS SUN RISES ON INLAND EMPIRE
By Brad Berton
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Rancho Cucamonga’s odd moniker may be the butt of occasional late-night talk-show jokes. But there’s a serious amount of new retail business in and around the city, which is one of several growing communities that constitute the western hub of Southern California’s so-called Inland Empire region.
Considering the way developers are augmenting the Inland Empire’s retail inventory — and the way merchants are flocking to new projects — it appears landlords and tenants expect the region’s extended growth spurt to continue indefinitely.
It’s hard to blame them. Retail developer Randall Lewis points out that the region’s already busy homebuilders are competing for perhaps a score or more of its subdivision sites (much of it farmland) being actively marketed today.
“Just a couple years back, there weren’t more than one or two” up for grabs, recalled Lewis, a principal and executive vice president at Lewis Retail Centers, Upland, Calif. Lewis Retail expects to break ground on a half dozen new Inland Empire centers totaling nearly 3 million square feet over the next 18 months or so.
While the freeways indeed remain crowded with rush-hour commuters, the Inland Empire (made up of San Bernardino and Riverside counties) has become one of the most resilient job markets in the United States. In fact, its economy is now bigger than those of 21 states, according to John Husing, director of Economics and Politics, a Highland, Calif.-based consulting firm. Husing’s latest quarterly economic report indicates that the region’s 3 percent job growth between May 2001 and May 2002 makes it the state’s “job-creation leader.” According to the report, the strongest employment growth, at 4.1 percent, was in the area’s so-called population-serving sectors: consumer services, education, health care, local government and retail. Building and housing followed with 3.1 percent, and the “nonlocal service” sectors (business services, distribution, engineering, hospitality and nonlocal government) grew 2.9 percent.
Investment brokerage firm Marcus & Millichap, Encino, Calif., predicts that the Inland Empire will see some 2.3 million square feet of retail space completed this year, off only slightly from the 2001 total. Yet, average asking rents have continued upward past the $16.50 per-square-foot mark (as measured by a “triple-net,” or NNN leasing structure, under which the tenant agrees to be responsible for maintenance, taxes and insurance), while vacancies have leveled at about 7 percent.
Though thousands more homes and residents are to come here, the Inland Empire’s retail sector is no longer merely chasing the new rooftops sprouting in the region’s relatively affordable bedroom communities. Retailers today are using sophisticated demographic techniques to define and identify their markets, according to Lewis.
“They want to be comfortable [that] a store will see good traffic immediately,” Lewis said, and retailers are particularly concerned about “cannibalizing” sales of existing locations.
Thus, burgeoning demand for higher-end homes is attracting a new generation of urban-style retail development, especially in the cities that define the hub surrounding the Ontario airport, which includes Rancho Cucamonga.
In Rancho Cucamonga itself, Lewis Retail teamed up with Cleveland-based Forest City Enterprises on a 1.3 million-square-foot, town center project dubbed Victoria Gardens, which is being slated as the city’s “new downtown.”
Meanwhile, near Rancho Cucamonga’s border with the city of Upland, local firms Pacific Development Group and Colonies Crossroads are working on the 1.1 million-square-foot Colonies Crossroads project, which features upscale retail, restaurants and entertainment.
Chalk that up in part to an important new east-west transportation corridor now under construction, the 28-mile extension of Interstate 210 known as the Foothill Freeway, which runs eastward from the Glendora-San Dimas area through several foothill communities, including Claremont, Fontana, LaVerne, Rancho Cucamonga and Upland. More than 150,000 vehicles daily will pass the Colonies Crossroads site, which literally spans the new freeway leg at the key Campus Avenue exit, said Jim Costanzo, a principal at Pacific Development. The center is part of a 434-acre, master-planned community that will contain 1,100 single-family homes.
The Kohl’s discount department store chain, which is launching an aggressive push into Southern California (it plans to open about 30 stores there, including anchoring Lewis Retail centers planned for Fontana and Ontario) heads the Colonies Crossroads pre-lease roster. The chain will be joined by Chick’s Sporting Goods, The Home Depot, PetsMart and Target.
“Strong demographics and freeway orientation are key factors for retailers deciding where they want to open new [Inland Empire] store locations,” noted Tom Swieca, first vice president at the CB Richard Ellis Ontario office and Colonies Crossroads’ lead leasing agent. Average household incomes within one mile of the project are in excess of $110,000, Swieca said.
“There’s a demographic shift taking place in the Inland Empire” that is generating more demand for upscale retail facilities than has historically been the case, said James Brooks, president of Empire Commercial Real Estate, Ontario. As more high-income Californians move inland from the coast, they’re expecting to find “neighborhood gathering places with more-stylish architecture and landscaping,” Brooks said. Empire Commercial is thus pursuing community center developments offering grocery stores, drugstores and the like as well as prominent national tenants, he said. “Many of our customers at these centers are paying $300,000 to $500,000 for their homes, so they’re naturally looking to shop at properties rivaling those in other wealthy parts of California.”
Though much of the latest Inland Empire retail product has focused on big boxes and grocery/drugstore-anchored centers, Victoria Gardens’ developers took closer aim at the increasingly upscale preferences of foothills residents. The nearby Ontario Mills and Montclair Plaza regional centers are performing well, but Lewis Retail and Forest City executives concluded that the Inland Empire’s western hub didn’t need another enclosed mall, said Lewis.
They aimed instead to bring “a different shopping experience” — more specifically, an open-air center clustered into fashion, lifestyle and entertainment districts and featuring a municipal library and performing arts center.
There has been a strong response from prospective tenants, several of which are just entering the Inland Empire marketplace, Lewis said. Macy’s and Robinsons-May recently committed to two of the center’s three anchor spots.
“The San Bernardino-Riverside area is one of our company’s fastest-growing regions,” said Robinsons-May Chairman Robert Soroka, announcing that Victoria Gardens will be home to the company’s sixth Inland Empire department store.
Down in the area’s southwest quadrant, Forest City is building a 280,000-square-foot expansion to its three-year-old Promenade in Temecula. The additions include a 165,000-square-foot Macy’s (the center’s fourth anchor) as well as a 35,000-square-foot expansion of the Robinsons-May. The additional gross leasable area will push Promenade past the 1 million-square-foot mark.
As is the case throughout the Golden State, tax structures (each community is responsible for raising its own revenues) motivate Inland Empire municipalities to compete for retail development. Rancho Cucamonga, for instance, is donating the Victoria Gardens site to the developers.
But despite the dramatic influx of retailers into the Inland Empire, Lewis said he holds little fear of a retail property oversupply. Retailers are more cautious when expanding today than during the Inland Empire’s 1980s boom and are employing substantially more-sophisticated market research methodologies.
“Retailers aren’t committing to new projects until they’re comfortable they’ll be seeing good traffic right away,” Lewis added. “So I’m not particularly concerned about [near-term] overdevelopment in the region.”
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