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San Bernardino: Broke, Yes, but One Sector's Booming

Wednesday, 1 Aug 2012 | 4:28 PM ET

California's Inland Empire has suffered some of the harshest effects of the economic downturn.

San Bernadino California
Jen Gotch | Workbook Stock | Getty Images
San Bernadino California

Unemployment is close to 12 percent. RealtyTrac says the region of Riverside, San Bernardino and Ontario east of Los Angeles had the worst foreclosure rate in the country in May. San Bernardinois in the process of seeking bankruptcy protection.

But one area of real estate here is hotter than the August heat. It's the ultra-big box commercial market, buildings over 500,000 square feet.

"Since 2010, we've had 34 transactions that have been executed in excess of a half million square feet," said Darla Longo, vice chairman at CBRE. "Currently we have 15 transactions in the market circling today for facilities in excess of a half a million square feet, and four of those are over a million square feet."

One of those new developments is a massive, state-of-the-art 1.8 million square foot distribution center for Skechers, built at a cost of over $200 million.

"We chose this spot because there aren't a lot of places in Southern California that has property to build a facility this size," said Skechers' senior vice president of distribution Paul Galliher.

The Boom in San Bernardino
The city of San Bernardino is now seeking bankruptcy protection -- but it's not all bust, there is some boom in this California city, reports CNBC's Jane Wells.

The new center consolidates six separate buildings Skechers used to lease 30 miles west. The new plant may be further from the port, but Galliher said, "There's more economic value to putting everything in one room." More than 500 people work there.

Not far away, Amazon is building its first distribution center in California and is accepting applications for what could be a thousand jobs. Other companies like Under Armour and Kohl's have opened facilities.

"I think it's probably the predominant sector that's still very active and very solid," said Iddo Benzeevi, President and CEO of Highland Farview, the developer which built the Skechers building.

Benzeevi's firm owns 3,000 acres of wide open scrub around the new building on which it hopes to develop a world class logistics park.

"You're talking about literally zero vacancy in a time when other sectors are struggling. It really is unprecedented," he said.

CBRE says these large new-generation facilities are being built for $60 a square foot. Rents, which fell 40 percent from the peak, are moving back up.

"We think by 2014, we should be back to our peak rents," CBRE's Darla Longo said.

There are challenges. The permitting process for ultra-big box developments requires patience, despite the jobs and taxes they bring. However, it's unlikely many companies would choose to locate these facilities outside of California to Nevada or Arizona.

Longo says half the goods which come into the Los Angeles and Long Beach ports stay in California to be sold or finished. Trucking them too far east for distribution means trucking a large portion back again.

Financing has sometimes been a challenge, and it's one reason Skechers became a co-owner of its building, not just a tenant.

"When construction loans became such a very difficult thing to obtain, we had to partner in order for that to happen," said Skechers' Paul Galliher.

CBRE's Longo says her company has another 10 million square feet "on the docket to accommodate the incredible demand that we've had."

Could big boxes lead to a big bubble? Iddo Benzeevi doesn't think so.

"You always need logistics," he said.

People may no longer be willing to pay $8 for a mug in a downturn, and instead pay only $4, but, he said, "Both still need to get on a shelf."

-By CNBC's Jane Wells
@janewells

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