Big-dollar industrial sales closing in La Palma and Irvine the past few weeks suggest that local real estate investors and developers are starting to look beyond high-end, fully leased buildings and consider riskier properties with high vacancy rates.
In La Palma, Australian investor Dexus Property Group this month paid $18.3 million for a 292,000-square-foot warehouse on 5911 Fresca Drive, near the Santa Ana (I-5) and Artesia (91) freeways.
The building is about 55% full, with Boston-based records management company Iron Mountain Inc. as its sole tenant.
The deal is one of the larger sales seen in West Orange County’s industrial market in the past year, and caps off nearly $60 million worth of local industrial deals made in the past nine months by Dexus, whose U.S. operations are run out of Newport Beach.
The sale also is a reflection of changing tactics among industrial investors, according to Bryan Bentrott, managing director of acquisitions for Dexus’ office here.
In the past year or so, “it’s been a top-down driven recovery,” with the best industrial spaces getting leased first to stable and growing tenants, Bentrott said.
Institutional investors have in turn chased those buildings so far this year, in some cases pushing down capitalization rates—or the expected return from rents—to nearly 5%. That rate hasn’t been seen since the last real estate boom.
Now, with a recovery spreading in the industrial market, investors are getting drawn to less-than-full properties if the price is right, said Bentrott, whose company’s buys of late also include buildings in La Mirada and the City of Industry.
Dexus paid an undisclosed Los Angeles-based partnership about $63 per square foot for the La Palma building.
In west county, where vacancy rates for industrial buildings are under 4%, the average asking price for an industrial building is about $122 per square foot, according to data from the local offices of CB Richard Ellis Group Inc.
With the leasing market picking up, especially for larger industrial spaces, Bentrott said he doesn’t expect too much difficulty filling up the building in La Palma with a single tenant or multiple occupants.
“The building may have more value as a (single-tenant) building,” he said.
With capitalization rates continuing to fall, more investors seeking healthy returns on buys “are going down the risk curve,” said Jeff Chiate, executive director at the Irvine office of Cushman and Wakefield Inc.
In some cases that might mean buying properties with higher vacancies and more leasing risks than they’d typically consider, said Chiate, one of the area’s top brokers for large industrial buildings.
“They’ve been forced to take different strategies,” he said.
Sharp Escrow
Chiate has been marketing a nearly 500,000-square-foot industrial building in Huntington Beach for Japan-based Sharp Electronics Corp., which no longer is using the now-empty property.
The Bolsa Avenue warehouse, which includes some office space, is said to be in escrow for a sale to an institutional investor. It was put on the market last year for about $47 million.
A different investment strategy also can be seen in Irvine, where Newport Beach- based Western Realco LLC recently snapped up a 13-acre industrial property on Red Hill Avenue for a little more than $19 million.
The property includes a 183,000-square-foot building that’s almost fully leased with multiple tenants. Western Realco doesn’t appear to be counting on the current leases to justify the deal.
The company said it plans to renovate the building and put it up for sale after existing tenants’ leases expire in 2014.
Western Realco also is looking to build two industrial buildings totaling about 80,000 square feet on an additional 3.5 acres of empty land at the site.
That development would be the first notable speculative industrial project seen in Irvine in several years, but it might not be the only new construction that area sees in the near-term.
Next door to the Western Realco’s latest acquisition is a nearly 4-acre parcel of land along Barranca Parkway that’s now in escrow.
The site is likely to be used for an office project rather than an industrial development, according to Cushman’s Chiate, who has the listing for the property.
Both the Red Hill and Barranca properties are a few blocks from the corner of the undeveloped Tustin Legacy project, which could get revived in a few years after some roadwork is completed.
The properties also are down the street from a high-end, largely empty industrial building on the Santa Ana side of Red Hill that sold in a bank-driven deal earlier this year.
Lakewood, Colo.-based Alliance Com-mercial Partners LLC bought the 366,471-square-foot building, at 2001 E. Dyer Road, for $23 million, or about $63 per square foot.
Western Realco paid $103 per square foot for its property at 16700 Red Hill Ave., although that price doesn’t include the value of the undeveloped land.
Tilly’s Plan
The only other Irvine industrial project currently in the works is in the Irvine Spectrum, where the owner of mall retailer Tilly’s Inc. is planning a 26,000-square-foot warehouse project.
