The ‘sexiest’ real estate in Southern California may be a warehouse
By one national measure — from Orange County-based Green Street Advisors — industrial real estate values have essentially doubled since the recession ended, up 11 percent in a year through April vs. a 1 percent decline for overall commercial real estate prices.
Trammell Crow’s new industrial real estate in Riverside.
If you think it’s hard to find affordable Southern California housing, try locating a warehouse to buy or rent.
There’s a noteworthy shortage of perhaps the most boring slice of real estate: so-called “industrial” properties that house everything from warehousing to logistics operations to manufacturing.
And it’s all because of you!
All that online shopping has changed the warehouse game. It used to be retail outlets held most of the consumer goods you bought. Today, the growing habit of clicking at home (or work) to buy puts more goods through warehouse shelves to be delivered to your door. And the consumer’s urge to have goods quickly — even the same day — means warehouses must be close to major metropolitan areas.
Like other real estate sectors, developers haven’t kept up with demand. As a result, forget ocean views … the hot properties are all those inland acres filled with dull concrete facilities filled with consumer goods and related transportation hubs.
“What industrial lacks in sex appeal … it makes up for in demand. It is clearly the most desired product,” says Mike Severson, chief acquisitions officer at Bixby Land Co. from Newport Beach.
Let’s talk industrial real estate numbers around Southern California …
Los Angeles County: Its 800 million square feet of industrial space is 98.6 percent full, according to the JLL brokerage. Another 2 million square feet is being built. Rents could rise 9.5 percent this year, Marcus & Millichap predicts. Recent big leases, according to CBRE Research, include Glenair Aerospace, Fashion Nova and Tempur Sealy.
Inland Empire: Its 520 million square feet is 96.3 percent full, JLL says. Another 21 million square feet is in development. Rents are expected to rise 8 percent this year after jumping 26 percent last year, says Marcus & Millichap. Recent big leases include Always, DCG Fulfillment and Sketchers, CBRE reports.
Orange County: Its 200 million square feet is 97.6 percent full with 1.2 million more coming. Rents are forecast to be up 4 percent in 2018 after averaging 7.6 percent gains in the previous five years. Recent big leases were to Volcom, Shindoa Design Center and Engineered Floors.
And these hot warehouses are not your grandfather’s warehouses.
In his three decades in the industrial real estate game, Tom Bak — a senior managing director at Trammell Crow Co.’s Newport Beach office — watched warehouses evolve from simple, modest-sized structures to today’s huge state-of-the-art facilities.
Dallas-based Trammell Crow recently finished building three industrial facilities with a combined 2.4 million square feet in the Inland Empire. And they’re “speculative” projects with no specific tenant in mind.
Bak notes that today’s warehouse operators demand taller facilities vs. what was built decades ago. That allows more stacked goods that can be accessed by robots, not forklifts. Floors are thicker and more precisely made to facilitate the often automated movement of goods in and out of the warehouse.
Electric supply is also a critical ingredient to power all the technology, as is energy efficiency to moderate costs. And the building must have ease of entry and departure, plus plenty of bays and parking for the trucks distributing goods. Oh, and increased security. There’s serious value in those inventories.
“Transportation is a major cost in any product,” Bak says. “There’s a very big focus on warehouses being more efficient.”
It hasn’t been easy for Bixby’s Severson to find industrial properties to buy. The real estate company has teamed with AXA Investment Managers to invest $400 million in industrial buildings in California, Arizona, Nevada, Oregon and Washington.
Severson sounds like many a frustrated local house hunter as he details the challenges buying industrial real estate: there are not enough options to choose from; those rare ones on the market draw multiple offers; bidding wars push up prices.
“The fundaments are great, there’s just not enough of it,” Severson says.
So, are soaring values of local industrial properties justified, even with prospects for continued rising rents and at least steady growth in demand for this kind of real estate?
By one national measure — from Orange County-based Green Street Advisors — industrial real estate values have essentially doubled since the recession ended, up 11 percent in a year through April vs. a 1 percent decline for overall commercial real estate prices. These properties are selling for so much the estimated investment returns are relatively close to what you could earn owning no-risk Treasury bonds.
“Nothing lasts forever. It’s got to slow down,” Severson says. “But right now, this feels like it could last a good four or five years.”
All your shopping from home has made warehouses sexy!