It’s not just offices being targeted for industrial conversions in Orange County.
Los Angeles-based Rexford Industrial Realty Inc. (NYSE: REXR), among the most active industrial investors in Southern California over the past several years, has paid $45 million for a shuttered Fullerton hotel with plans to convert the property into an industrial building.
The conversion is the first of its kind planned for Orange County, where offices and retail sites more frequently make way for industrial uses.
“To my knowledge, this is probably the first existing/operating hotel property that would be demolished and converted to industrial use in the Orange County, as well as infill Los Angeles markets,” Cushman & Wakefield Senior Director Randy Ellison told the Business Journal.
The Hotel Fullerton is a 250-room hotel that opened in 1967 and closed during the pandemic; the 7.2-acre site will be redeveloped into a 140,000-square-foot industrial building. The site is already zoned for industrial use, and construction is slated to begin next year.
Huoyen International Inc. sold the site at 1500 S. Raymond Ave. in a deal that works out to about $6.3 million per acre, about $2.4 million more per acre than what Prologis Inc. paid for the 24-acre Pacific Vista Lake Forest campus.
When compared with OC hotel transactions, the deal is the third priciest so far in 2022.
The property is located “immediately off SR 91, with high freeway visibility,” according to Cushman & Wakefield, who represented Rexford and the seller in the off-market deal.
“This sale reflects the continued trend in Southern California and other markets of repurposing properties that are in industrial zones but are not active industrial uses,” Ellison said in a statement.
The hotel conversion marks a first in OC for Rexford, which been busy of late sourcing offices for new local industrial projects.
Second Fullerton Buy
The deal is one of four recent industrial acquisitions for Rexford, which shelled out nearly $164 million over the past month for the Southern California infill sites.
In addition to the Fullerton deal, Rexford acquired a Los Angeles site it intends to redevelop into a 45,000-square-foot industrial building, and two existing industrial buildings in Panorama City and the Inland Empire.
“Our year-to-date investments total $774 million,” with an additional $600 million in planned deals, Co-Chief Executives Howard Schwimmer and Michael Frankel said in a statement.
The Fullerton industrial development will include excess land for trailer or outdoor storage, Rexford said, and is expected to generate a 4.8% unlevered cash yield upon stabilization.
The acquisition marks Rexford’s second in Fullerton in the past year; the firm, which counts an OC portfolio nearing 4 million square feet, in August paid $24.2 million for a 5.8-acre industrial site, where it is building a 139,000-square-foot distribution facility.
Industrial vacancy rates continue to shrink to historic levels—OC’s rate was 0.9% at the end of the first quarter, according to CBRE Group Inc.—yet development options remain limited, prompting companies to source underused commercial sites for conversion projects.
In the wake of the pandemic, those underused sites are offices, hotels and retail stores.
“In the current climate, industrial real estate has become recognized as a highest and best use option to certain select hotel and office properties situated on large sites across the region where such conversion makes sense and pencils in the long term,” Ellison said.
For Rexford, the office market proved to be its biggest source of local dealmaking in 2021.
Over half of the $200 million-plus of OC purchases for the REIT last year were for office parks.
Rexford’s largest two deals here last year were the $105.3 million purchase of Santa Ana’s 370,000-square-foot Pacific Corporate Center, and Orange’s 191,000-square-foot Volt Campus, a 12.5-acre site between the Costa Mesa and Orange (57) freeways that it bought for $70 million.
Those buildings will eventually make way for industrial projects once long-term leases expire for the existing office tenants.
“There’s more industrial development going on in Orange County than there has been in several years, in large part due to industrial land value spiking dramatically over the past six to 12 months,” Patrick Schlehuber, executive vice president of investments at Rexford, told the Business Journal in October, after completing those two deals.
“Hence why it makes sense to convert outdated suburban office buildings into new industrial product.”