NOT SO FAST:
Industrial May be Moving to the Inland Empire, But There’s Still Room for Growth Here
Last year marked the passing of the industrial torch, with the amount of space devoted to industrial use in the Inland Empire surpassing that in Orange County.
The Inland Empire has 261.6 million square feet of industrial space at the end of the fourth quarter vs. 241.5 million square feet in OC, according to CB Richard Ellis Services Inc.
Don’t look for an OC comeback. Real estate players cite OC’s scarce, expensive land as impediments to big growth. Still, there are opportunities to do in-fill building and rehabs of existing space in the county. And small industrial space is still a hot buy for some companies.
Business Journal reporter Daniel Williams asked some of the region’s experts about the future of OC’s industrial space. What will it take for the county to see growth in industrial space?
JIM CAMP
Senior vp, acquisitions and development,
Voit Commercial Brokerage
The answer is simple: you look at the availability of land and the price of land.
You need 55 acres to build a big-box industrial building. Where are you going to find that in OC? You need to go to the Inland Empire. Some go even further, to places like Victorville, where land prices are a fraction of what they are here.
There’s not a lot of land zoned for industrial use to begin with, and with high land prices, it doesn’t make sense to build straight industrial space in South OC.
To make economic sense, developers put more office space in their industrial buildings and see them evolve from straight industrial to research and development and, ultimately, to office space. You also can make it work by selling the land directly to owner-users. We’re finding ourselves selling more to users than developers, due to high prices.
In the Inland Empire you can find land for less than $6 per square foot. In North OC, much of the land is built out, so you’re looking at second-generation land. The prices haven’t soared there yet, but it’s not cheap, either, at about $10 to $12 per square foot.
But there are market niches. Interest rates are at 40-year lows. It’s a great time to buy. We’re seeing good activity in the 5,000- to 50,000-square-foot range. But the smallest buildings are going the fastest. They’re almost trading like homes.
DOUG GOLDEN
Managing director, Irvine
Charles Dunn Co.
Basically, if we’re to see new growth, much of it will come from the reuse of property due to the scarcity of land. In places such as Anaheim we’ve already seen large manufacturers tear down older buildings and build new ones in their place.
OC has had more success with smaller buildings for sale. When you’re looking at big-box facilities, we have very few choices for locations, whereas the Inland Empire has the raw land, the space to build big industrial buildings that require 32-foot clearance.
In the future, we’ll see developers going the in-fill route in OC. We’ll also see developers go to more standard buildings, with a larger office mix of up to 35%.
J. R. WETZEL
Managing Partner, PGP Partners Inc.
Board of Directors, National Association of Industrial and Office Properties,Southern California
Although large and medium size industrial users are continuing to move to the Inland Empire, it doesn’t dim OC’s very bright past, present and future of industrial space.
It will be increasingly difficult to build a lot of new industrial in OC due to both high land prices and the difficulty of getting cities to approve industrial projects. But the limited new industrial space that will be built here will be hotly sought after.
And owners of existing industrial properties in OC have reason to be very optimistic.
Once the economy begins to improve either later this year or in 2004, those markets will tighten quickly and rent increases will be facing tenants and users who want or need to lease or buy industrial space.
Although rents are down somewhat compared to 2000 and 2001, in the next 10 years I think landlords will have the advantage over tenants at least 60% percent of the time and maybe even 80%.
In the future we will see some limited small and medium industrial buildings added to the supply but not many large buildings due to low land availability and high land prices. Rehabilitations, and in some cases demolition of obsolete industrial buildings, will become more prevalent in the next decade.
BURTON YOUNG
President,
SVN Equities, a unit of Sperry Van Ness
The outlook for industrial space in OC is good or bad, depending on how you look at it.
Since land is scarce and becoming more and more valuable, there are much higher and better uses than industrial for OC land.
The competition for housing, retail, apartment, office and research and development space is pushing prices for industrial land and buildings higher. This is good for owners, bad for tenants.
More bad news is that the competition for space is forcing industrial users out of the county, too.
Industrial users will continue to move toward the Inland Empire with OC continuing to recycle the industrial land as redevelopment continues to be profitable.
For OC to see big growth in the industrial sector, city and county agencies would need to zone more land specifically for industrial use and be disciplined about not rezoning existing industrial areas.
This isn’t likely to happen as industrial land is the least valuable and brings the lowest tax base for city and county coffers.
I don’t think the future holds much in the way of new growth for OC industrial development. I believe the emphasis will continue to be redevelopment of older, more obsolete buildings into state-of-the-art industrial space.
STEVE CASE
Senior managing director, Southern California
CB Richard Ellis Services Inc.
The OC industrial market is currently split into two distinct markets.
The first market is characterized by large corporate users that typically lease buildings 50,000 square feet and greater. This market has been extremely slow due to the uncertainty of the economy and business prospects for large corporate users.
The second part of the market is characterized by small, entrepreneurial businesses that prefer to own their industrial buildings vs. leasing. This market is extremely strong, with tremendous demand for buildings for sale below 50,000 square feet. The demand is even stronger for buildings smaller than 25,000 square feet.
Small-business owners are looking to buy industrial buildings for the same reasons that renters are moving out of apartments and acquiring homes: historically low interest rates.
ROBERT STROM
Principal,
CIP Real Estate
The development of new industrial space in OC depends first on the absorption of existing property. Since OC has higher rents than the Inland Empire, it hasn’t attracted the manufacturing and distribution users drawn to cheaper rents.
While other areas have seen dips in the cost of real estate, wages and benefits, costs in OC continue to escalate due to the lack of available land and a demand for higher quality of life.
Tenants now are choosing to move where rents and employee costs are less expensive, causing numerous industrial projects to sit vacant in South County, where high-tech jobs caused extensive development of tech industrial and research and development space.
North County, which has lower rents than South County,but not as low as the Inland Empire,has seen more industrial activity. But the lack of available land has increased the cost of industrial development and hindered new projects.
For OC’s industrial sector to revive, developers must see standing projects absorbed. They must be confident that there’s enough demand to justify new projects in OC.
KEVIN TURNER
Senior vice president,
Colliers Seeley International Inc.
OC is limited by the availability of affordable land. In the 50,000-square-foot range, there is relatively ample supply. But it’s been very slow to fill up. Generally, Corporate America has been sitting on its hands for the past 18 months.
Before the softening of the market, if an 80,000-square-foot facility came on the market, it would have had multiple offers and likely would have leased before hitting the market.
But reality has set in. The market is soft. And that reality has set in for owners who want the next deal. They are ready to sell and are softening their rates.
You’ll see developers asking themselves whether they should build a new facility, unless it has a very specific purpose.
But there’s still white-hot demand to own buildings. And that’s caused an interesting dynamic in today’s market. Nine out of 10 users want to buy right now,they don’t want to lease. Five years ago that number would have been inverted.
DOUGALL AGAN
Principal,
Stirling Airports International
It’s fundamental. There’s not as much land available for industrial development.
There’s some land at Baker Ranch and some at the Irvine Spectrum, but those are high-end industrial, where you’ll find higher profile tech companies.
While some large distribution companies will look to the Inland Empire where there’s more available land, I don’t see a migration of OC companies, not where there’s corporate levels involved.
For instance, you saw Ingram Micro Inc. and Oakley Inc. move distribution to the Inland Empire, but they left their office and corporate personnel here.
This type of move is an indication that there will be some segregation for businesses to improve their bottom lines. I’ve spoken with companies in San Diego, and they want to segregate, but they believe the distance is a psychological barrier for them,for now.
But there will come a time, when the price difference is too great, that companies are forced to look more to the Inland Empire.
RAPHAEL BOSTIC
Director, Casden Real Estate Economics Forecast
University of Southern California’s Lusk Center
To get significant growth in new industrial space in Orange County, we’ll need to see a resumption of sustained growth among the county’s industrial producers.
This sector felt the sharp sting of the recession and has not recovered to levels that would lead to large-scale investment in many projects. That said, the manufacturing sector has performed better in recent months than it has in other years, and so we should see some activity moving forward.
NAT HARTY
President,
Stowe-Passco Development LLC
There still is a very strong demand for small companies to buy industrial buildings,the smaller the better.
Buildings in the 6,000-square-foot to 10,000-square-foot range are seeing the greatest demand.
With interest rates as low as they are, there’s a disincentive for leasing vs. owning. Leasing has been very slow because owners find it’s cheaper to buy than lease. We’re generally only seeing leasing when a user needs space, and needs it right now.
And you’re not seeing as much new product coming on line.
But the availability and price of land in the Inland Empire has made it very attractive.
