Building on Ontario’s Success

Now that Ontario has established itself as one of the country’s biggest warehouse and distribution centers, other growing Inland Empire cities want to get in on the act.

Developers hope to turn thousands of acres around two former Air Force bases in San Bernardino County into distribution hubs featuring huge warehouses like those in and around Ontario, which has evolved in the last dozen years to become one of a handful of leading distribution hubs in the nation.

Ontario’s allure as a distribution hub is evident in the statistics. Developers have built more than 120 million square feet of warehouse space near Ontario International Airport over the last dozen years. Most of that space remains occupied despite the economic slowdown, according to Grubb & Ellis Co., which shows the vacancy rate for Inland Empire industrial space at only 7.3% in an industry where vacancy under 10% is considered healthy.

The big attraction in Ontario has been big buildings, some approaching 1 million square feet under one roof.

Such buildings are in demand by modern warehouse operators, some of which are manufacturers that distribute their own goods and others--known as public warehouses--are enterprises that manage warehouse and distribution operations for other companies.

These modern distribution operations require much larger facilities and a number of other features that aren’t usually available in older industrial areas such as Los Angeles County. One reason for the Inland Empire’s preeminence as a distribution hub, according to the Los Angeles County Economic Development Corp., is that Los Angeles County lacks land where these huge modern warehouses can be built.

Los Angeles County still has a much larger inventory of industrial space--about 900 million square feet compared with the Inland Empire’s 250 million--but Ontario boasts a greater concentration of modern distribution space than anyplace else in Southern California and most other places in the nation.

But even Ontario is running short of land, so other parts of the Inland Empire--which includes Riverside and San Bernardino counties--hope to emerge as centers for logistics operations. Among the largest of these are the former George Air Force Base in Victorville and the former Norton Air Force Base in San Bernardino.

At the Victorville site, now known as Southern California Logistics Airport, developer Dougall Agan’s Laguna Hills-based Stirling Airports International and the city of Victorville operate a public-private partnership to woo big warehouses and aircraft maintenance operations to the facility about 50 miles north of Ontario.

Their efforts have brought two companies to Victorville: Goodyear Tire & Rubber Co., which recently opened an 830,000-square-foot manufacturing and distribution facility on 46 acres, and Mars Inc., which is building a 450,000-square-foot distribution facility on 44 acres. Aircraft maintenance giant BAE Systems, the conglomerate born of the merger two years ago of British Aerospace and Marconi Electronic Systems, recently signed a long-term lease on hangars at the airport, where BAE will maintain and retrofit commercial airplanes.

Agan said more companies will migrate to Victorville for some of the same reasons they migrated to Ontario from Los Angeles. The former air base there has much more land available--about 5,000 acres--than nearly built-out Ontario, he said. Ready-to-develop land costs about $1.50 to $2 a square foot in Victorville, compared with about $5 to $7 a square foot near Ontario.

One of the biggest reasons that the former air bases and other Inland Empire sites can attract big warehouse operations, Agan said, is that Ontario’s success has established the region’s credibility as a distribution center and has led to competition within the region for those operations.

“Every prospect that we’re pursuing is probably comparing us with other sites in Ontario and other sites in the Inland Empire,” he said.

The 2,200-acre former Norton facility, now called San Bernardino International Airport, is being developed by the Inland Valley Development Agency and the San Bernardino International Airport authority. The two public entities have struck a deal with Texas-based Hillwood Investments, owned by Ross Perot Jr., to bring businesses to the former air base. Hillwood is close to lining up at least one large warehouse user and possibly three, said T. Milford Harrison, executive director of the development agency.

The former air bases and the rest of the Inland Empire could face a temporary lull in demand for the big box spaces because of the worsening economy, market observers said, but they added that long-term prospects remain strong for distribution space.

“We had one large retailer that looked like a good candidate for our new building, but they pulled back because they’re reassessing their needs,” said Gary Edwards, a vice president at Newport Beach-based Western Realco, which broke ground in June on 1.1 million square feet of industrial space in a three-building project near Ontario International Airport.

The retailer was looking at the largest of Western Realco’s buildings, an 857,000-square-foot facility, said Edwards, who noted that the prospective tenant made the decision to pull back before Sept. 11.

Though it’s unknown how the distribution industry will be affected by the slowing economy and the Sept. 11 terrorist events in the short term, Edwards said the long-term prospects for the industry in the Inland Empire are good because the region is a leader in providing the type of space required for modern warehouse operations.

Staying in the lead requires ever-larger and more advanced warehouses, said real estate broker Herrick Johnson of Lee & Associates.

A building of 400,000 square feet that was considered large just a few years ago might be too small for many tenants now, Johnson said, and buildings with 24-foot ceilings that were state-of-the-art when built seven or eight years ago may be too low by today’s standards.

Warehouses today can go up to 40 feet high, Johnson said, and they require so-called super-flat floors, built almost perfectly flat so that merchandise racks can be stacked high without toppling over. Today’s tenants also demand more-advanced fire suppression systems, bigger loading docks and more room for trucks to maneuver.

One potential problem facing some Ontario-area buildings, Johnson and Edwards said, is that warehouse preferences are evolving so rapidly that some facilities built in the mid-1990s already could be outmoded, and those buildings could be difficult to fill when tenants’ leases expire.

“There will probably always be users for the older buildings,” Johnson said, “but it will probably take longer to find tenants for them.”

Owners of the older buildings will continue to face competition from newer structures, Johnson said, adding that many warehouse operators will choose newer buildings even though it means paying higher rent.