Brett Turner, managing director, acquisitions, at BKM Capital Partners, recently discussed the SoCal industrial market with Andrea Zander, web content editor at Institutional Real Estate, Inc.
1. Why is the Southern California industrial market thriving?
Widespread economic expansion has driven tremendous demand for industrial product over the past decade, and Southern California is no exception. The bulk of this demand is consumer-driven.
A recent survey cited by Urban Land reveals that the proportion of consumers who consider a three- to four-day turnaround of goods “fast shipping” fell to 35 percent in 2017, down from 42 percent in 2016 and 53 percent in 2015. This sharp decline represents not only what consumers demand, but what America’s companies must deliver to survive.
The result is a clamor toward logistics and industrial facilities that reach a wider base of consumers more readily.
The shift from one large facility to many small facilities fuels growth in our sector of focus: multi-tenant industrial. Here, major industrial players and smaller companies alike find the location and functionality they need for their businesses to thrive.
In Southern California, other factors such as growth in tech and entertainment are fueling this growth. For example, we recently acquired one of the only business park assets in Burbank, California — the epicenter of entertainment production for broadcasting and radio.
The rapid adoption of 3D printing is another trend that is fueling growth in the multi-tenant industrial sector. In the past, manufacturers needed huge facilities to accommodate orders. Today, however, many items are printed on-demand in smaller physical spaces. This trend is especially prominent in the medical device sector. For example, one of our tenants in the Kearny Mesa submarket of San Diego is a leading medical device company focused on transforming spine surgery. The company has announced a series of 3D printed implant solutions that are produced on-site in their 5,940-square-foot space.
With very limited industrial supply and tremendous demand from both tenants and investors, the multi-tenant industrial market in Southern California is most certainly thriving and is poised to deliver strong returns for many years to come.
2. How would you compare the current Southern California industrial market to last year’s performance? What are some differences?
The Southern California industrial market continues to gain strength, driven by economic growth and ongoing e-commerce demand.
Los Angeles was recently named the top city in the world for industrial investment, according to Cushman & Wakefield’s Winning in Growth Cities report. From June 2017 to June 2018, $9.2 billion was invested in industrial properties in the market, up 21.4 percent from the previous 12-month period.
Los Angeles also boasts the lowest industrial vacancy rates in the U.S. as of third quarter 2018.
Orange County is experiencing tremendous demand for warehouse and logistics space with little to no new supply, while San Diego posts strong growth in the manufacturing sector.
The Inland Empire — arguably one of the nation’s strongest industrial markets — continues to demonstrate rapid upward momentum with 32 million square feet leased through the third quarter.
The primary difference between 2018 and 2017 in this region has been availability of product. As expansion continues, the industrial market has tightened, and new supply has been governed by tight lending restrictions.
All of this activity is driving widespread rent growth, not only in Southern California but throughout the U.S.
By third quarter 2018, net asking rents reached their highest rate in modern history, according to CBRE.
The takeaway for institutional investors is that a tremendous opportunity for value creation is still available in this sector; however, finding the right property requires an operator with specific experience in industrial or multi-tenant industrial product.
3. Who are the big-name manufacturers and retailers helping the market? And why? Are there other tenants showing an increased presence in the market?
Southern California is a draw to many of America’s largest and most powerful companies spanning a wide variety of industries. That said, investment in light multi-tenant industrial product must be looked at on a market-by-market basis.
At BKM, for example, each market we invest in must have an established supplier in the form of a large company such as Amazon, Nike, Boeing, Tesla, etc., or be in close proximity to a major port, such as the ports of Los Angeles and Long Beach.
For each employee at one of these corporate giants, there are typically 1.5 employees at a nearby small business that supports the local giant in some way.
This “food chain” is replicated all over the nation. In fact, more than 80 percent of U.S. companies are small businesses. These companies need space to lease typically within a 5-10 mile radius of their major customer/supplier. These are our tenants, and they are not going anywhere.
The result is long-term stability and an opportunity to create and drive value.
Even as this product type leaps forward in stability and value creation, its supply in Southern California and nationally continues to dwindle. Multi-tenant industrial is often the first product type to be torn down and replaced with multifamily. The result, as in the aforementioned Burbank acquisition, is that BKM is often acquiring “the only game in town,” supporting even stronger investor returns.
4. With rising demand, how will institutional capital allocations change?
Institutional investors have begun to recognize the tremendous and inherent long-term value in industrial product, and specifically light multi-tenant industrial.
The challenge, however, is the transaction size in this sector.
For large institutional managers, multi-tenant industrial is simply too small in terms of purchase price. The big players can’t deploy enough equity to make the acquisitions make sense.
These is where niche fund managers like BKM come in. Institutional investors look to us to make the acquisitions and create value, and ultimately build an institutional-level portfolio of these assets.
As a niche investment manager with a focus solely on multi-tenant industrial, we have already seen a widening investor base and strong performance to date, and anticipate continued growth in 2019 and beyond.
5. What are your expectations for the end of the year and next year?
We expect to see a continued surge in rates as landlords, still beleaguered by the recession, quickly dissipate and realize the strong demand in the multi-tenant sector. This rate push will be met with a dwindling stock of supply as product is destroyed to become multifamily, creating that once in a lifetime opportunity we all learned about in Econ 101.