Retail in High Demand Amid Rapidly Growing Population of Riverside San Bernardino Counties

Strong population growth, coupled with an increasing number of highpaying jobs, has set the stage for a solid retail market, where shopping centers are a hot commodity. National retailers are making a major push into the region as they try to take advantage of the healthy population growth, which is expected to exceed 100,000 this year. Wal-Mart has plans for two more Supercenters, while Home Depot also has plans to open two stores this year. Much of the construction is in the path of new home development, including the largest project this year, the 364,000-square-foot Falcon Ridge Town Center in Fontana. Owners in high-growth markets have experienced improved property operations despite new supply coming online. For example, the average gross revenue in Victorville and Temecula/Murrieta increased 5 percent and 4 percent, respectively, last year and is forecast to record similar gains in 2005. The only area of concern has been Rancho Cucamonga, where shopping center owners have lost tenants to Victoria Gardens and other new centers. Vacancy in the submarket increased 200 basis points in 2004, to 6.4 percent, and is expected to stay at this level during 2005, as more centers are slated for completion.

Small shopping centers in the growth path will be prime investment targets in 2005, with single-tenant properties remaining the prefer-red choice for buyers seeking a stable return. Victorville has been booming with new home construction, which spurred retail demand and helped vacancy to drop 400 basis points over the last 18 months, to 4.5 percent. As a result, investors have been aggressive in the area, causing the median price to rise by 15 percent over the past year, to $87 per square foot. Single-tenant properties are expected to remain actively traded in 2005, as cap rates in the 5 percent to 6 percent range rival returns in other investments, including CDs and bonds.

* Rent Forecast: Tenant demand will remain high in the region during 2005 as retailers seek to capitalize on one of the strongest retail markets in the nation. As a result, the average asking rent is expected to increase by 4 percent, to $18.60 per square foot.

* Investment Forecast: Investors seeking upside potential should direct their search to redevelopment zones, such as San Bernardino and the emerging Beaumont area. Ambitious plans are in place for the intersection of Interstate 10 and Highway 60, including 3,000 homes and a regional shopping center.

* 2005 NRI Rank: 6, No Change. Riverside-San Bernardino held its spot with low vacancy and strong household growth potential.

* Employment Forecast: A more favorable business climate will continue luring companies from the coastal markets in 2005. As a result, we expect employment to increase by 3.2 percent, or 36,000 jobs. Trade and transportation jobs will account for most of the growth, as warehousing and trucking companies find the Inland Empire a more affordable and convenient location than Los Angeles.

* Construction Forecast: Development activity in the region will slow to 2.9 million square feet in 2005, down from 4.2 million square feet last year.

* Vacancy Forecast: Tenant demand is expected to remain strong in 2005, given expectations for high job and population growth. Vacancy is expected to hold steady at 6 percent, however, as retailers absorb the new space coming online.

* 2005 NRI Rank: 22, Down 6 Places, High rent growth, and low and declining vacancy were counteracted by an average job growth forecast, which led to Sacramento's decline.

* Employment Forecast: Sacramento's job market is forecast to expand by 2 percent in 2005. Uncertainty still surrounds the government sector, the region's largest employer.

* Construction Forecast: Approximately 1.2 million square feet of retail space is scheduled to come online in 2005. Although developers will pull back slightly this year, the pipeline remains significant, with almost 10 million square feet of retail space reported to be in the planning phase.

* Vacancy Forecast: Continued improvement is in store for Sacramento retail owners in 2005 as vacancy falls 70 basis points, to 6.3 percent. Strong household growth will bolster retail sales, with the fast-growing areas of Elk Grove and Folsom posting the most significant gains.