Amazon.com’s recent entry into Orange County’s industrial market is the clearest example yet of the growing role that e-commerce is having on the area’s warehouse and distribution building base.
The Seattle-based online retailing giant, in arguably the most notable local industrial lease of the year, last quarter quietly took roughly half of the space at Irvine Crossings, a 395,673-square-foot property on Von Karman Avenue in Irvine close to John Wayne Airport.
It was the first known industrial facility in Orange County taken by one of the country’s top users of industrial space. Amazon’s worldwide base of leased properties approaches 120 million square feet.
Local market watchers familiar with the deal, which was first reported in the Business Journal in September, say the lease is a linchpin in the company’s growing same-day delivery services in Orange County.
Amazon is in the midst of growing its Amazon Prime Now business that’s designed to deliver more than 10,000 of its most popular items within two hours. It’s also expanding its same-day delivery of grocery items in the area, according to real estate sources.
The roughly 180,000-square-foot lease in an older building undergoing upgrades to accommodate Amazon falls counter to what the company is best known for in terms of its real estate: massive logistics centers.
Its recent deals outside of OC include a recently signed 1-million-square-foot lease with the Irvine office of Goodman Group for a distribution and logistics center the industrial developer is building in Eastvale in northwestern Riverside County. It’s one of several big facilities Amazon has in the Inland Empire.
The smaller deal in the long-established Irvine Business Complex area, which is close to a large base of area residents from which to draw business, fits in with the new reality for retailers with an online presence, according to area brokers.
“E-commerce continues to drive and reshape the region’s infill industrial real estate markets, such as Orange County,” said Mike Adey, a senior associate with Cushman & Wakefield’s industrial capital markets division. “These users need to be located close to their consumers and will often occupy space that other, more traditional industrial uses cannot. Similarly, e-commerce users are often willing to pay a higher rent in exchange for a ground-zero location.”
Amazon is following that strategy to accommodate Amazon Prime Now deliveries, according to national reports.
The company has kept details of the rollout close to the vest. Chief Financial Officer Brian Olsavsky said in July that Amazon Prime Now was “now in more than 40 metro areas worldwide.”
Warehouses used for the growing service are typically 50,000 to 60,000 square feet and are fed by 86 much larger fulfillment centers, according to a March report in online business publication Quartz.
Amazon recently signed a roughly 60,000-square-foot lease at an above-market rate for a location near the Los Angeles ports to help feed the service, according to Louis Tomaselli, senior managing director with the Irvine office of JLL. The lease, like that at Irvine Crossings, is at an above-market rent, he said.
An ‘Anomaly’
Using Amazon, with its massive size and online retail market presence, as proxy for the growth of the area’s e-commerce industry isn’t necessarily apt, according to Kurt Strasmann, senior managing director of the Newport Beach office of CBRE Group Inc.
“Amazon is an anomaly,” said the head of the industrial and logistics practice for the brokerage’s Southern California operations.
What’s certain, though, is that e-commerce is “absolutely affecting our local market and all markets,” Strasmann said.
He estimated that 30% of smaller recent industrial leases in OC involve tenants with various e-commerce aspects to their businesses, such as fulfillment centers.
The trend falls in line with national data. E-commerce sales in the first quarter accounted for 7.7% of retail sales, up from 4.2% in 2010, according to data from the U.S. Census Bureau.
E-commerce “is here, and more is coming,” Strasmann said.
Orange County’s industrial market occupancy rate is near an all-time high—vacancy is about 4%—so the increasing demand is resulting in new life for some older area properties, such as Irvine Crossings.
“There’s a big boom for Class B space,” Strasmann said. “Users are absolutely set on getting into infill locations.”
If newer properties aren’t available, “then they are taking the best alternatives,” he said.
That will likely lead to rental appreciation of older Class B buildings and price appreciation of the same buildings when they’re listed for sale, especially if they already have e-commerce-related tenants, Strasmann said.
“The e-commerce impact has also carried over into the capital markets world” across OC and L.A., said Cushman’s Adey. “While industrial offerings are receiving a great deal of attention from investors in general, the buildings that are leased to e-commerce related tenants are white hot.”
E-commerce’s growing prominence in the local industrial market played a part in the biggest sale here this year, according to CBRE brokers who worked on the deal.
Toronto-based real estate investment adviser Bentall Kennedy paid about $188 million, or $195 per square foot, last month for seven recently built properties at Anaheim Concourse, an 80-acre industrial project near the Riverside (91) Freeway that once served as a Boeing Co. campus.
The buildings total 965,255 square feet and comprise the for-lease portion of the largest industrial development built in Orange County in over a decade.
All-Time High
The deal by total price is the biggest sale of OC industrial buildings in one location in that same time period, according to data from market tracker CoStar Group Inc. The per-square-foot price also represents an all-time high for large industrial sales in the region, according to CBRE, whose Western U.S. National Partners division had the listing for the property.
The high price tag reflects the limited amount of new, high-quality industrial product on the market in Southern California, and the enviable location is another key factor, CBRE brokers said.
With “the increasing necessity for same-day deliveries, particularly for e-commerce companies, being located close to major consumer hubs is integral to success today,” said CBRE senior vice president Michael Kendall.
Tenants at the buildings Bentall Kennedy just bought include Etekcity, an internet-based retailer and wholesaler that sells home improvement, consumer electronics, and outdoor equipment.
Few industrial properties like Anaheim Concourse are under construction here, despite increasing demand for space.
“There has been slight infill development in [Orange County]. However, more infill development is prohibited by the lack of land and its high cost,” said Cushman & Wakefield Executive Director Rick Ellison.
Newport Beach-based developer Western Realco, which is behind the bulk of new industrial development under way in Brea, also plans a nearly 1-million-square-foot industrial and office project at the former headquarters of Beckman Coulter Inc. in Fullerton that would encompass 978,665 square feet over eight buildings on 44 acres.
Company executives say they hope to get city approval by year-end, said Gary Edwards, principal for the developer. Construction could start by early next year and take 10 to 11 months, he said last month.
Redevelopment of older, Class B properties also appears likely as e-commerce tenants look for good locations in OC.
One big site that real estate watchers are keeping an eye on is a roughly 41-acre property in Buena Park that J.C. Penney Co. uses as a regional logistics and distribution facility.
The retailer plans to sell the site and relocate, likely to a smaller location in the Inland Empire.
The property, which spans about 1.1 million square feet, is one of the largest industrial buildings in OC but could be redeveloped by a new owner into a multibuilding site, according to Clyde Stauff, senior executive vice president in the Irvine office of brokerage Colliers International.
It’s also possible that an e-commerce company such as Amazon could buy the site and keep it as one building with some renovations to make it more functional, Stauff said.
“It’s certainly one of the largest buildings in the L.A.-Orange County submarket,” said Stauff, who’s one of the busiest industrial brokers in the Mid-Counties region. “Its centrality will certainly appeal to e-commerce users.”
