A New Wave OF Demand and Design is Changing Industrial Buildings

Aliza Karney Guren remembers accompanying her father to tour industrial properties he had developed or acquired when she was a young girl in Southern California.

To an 8-year-old, the warehouse and other industrial properties looked just like a plain old big box.

They were simple, drab and not very exciting, said Guren, now the CEO at Karney Properties.

“[As kids, my sister and I] would not be excited by seeing these tilt-up industrial boxes — by their shapes, architecture or going inside and seeing very simple offices and large manufacturing spaces … so when he used to make us go with him on weekends to go visit buildings, we rolled our eyes and weren’t very excited about it,” Guren said.

Guren’s father, David V. Karney, founded Karney Properties in 1952 and today, the firm owns and manages millions of square feet of industrial and retail properties in Arizona, Colorado, Illinois and mainly in Southern California.

Those days of dreary and boring industrial buildings are mostly over.

Many of the small and midsize warehouses and industrial campuses that used to be occupied by air conditioning companies or small manufacturing businesses in the core of Los Angeles and infill markets in Southern California have transformed into hip creative offices with amenities galore.

Large entryways, high-end bathrooms, conference rooms, kitchens, gyms, fire pits, indoor and outdoor spaces with glass rollup doors and a view of a garden are among several common amenities.

Shoe company TOMS' headquarters in Playa Vista has an inflatable slide that gets people down from the second floor to the first floor, Guren said.

Google transformed the home of Howard Hughes’ Spruce Goose Hercules H-4 plane into a 450K SF office that includes high ceilings, open offices, conference rooms, event space, a coffee shop and a gym.

Fueled by deindustrialization, less manufacturing, a demanding younger workforce and a new generation of employers adapting to a changing workplace landscape, a creative movement is occurring in the industrial sector — at least in the 10K SF to 450K SF range.

But even developers of larger distribution and logistics centers in the 1M-plus SF range are upping the amenities for the office components in those buildings.

Much like creative office, industrial owners and developers are seeing a need to amenitize buildings to attract tenants and workers.

"It can be a cool factor for them, where they reposition the asset from a traditional office building that they would have gotten into, to a really cool amenitized, progressive and creative office environment," CBRE Executive Managing Director Kurt Strasmann said.

"It's a natural evolution of creating higher and better use," Strasmann said. "The difference is that the creative and progressive office is a much more sought-after asset class than traditional office buildings. The workers prefer that type of environment that's different, cool and amenitized and that leads them wanting to stay on campus longer."

The popularity of repositioning these industrial assets is contributing to the industrial sector's record numbers. Vacancy is at an all-time low and sale prices are up nationwide.

"The fundamentals are great," Strasmann said. "It's the strongest it has ever been, and we're anticipating another banner year in 2019. We've had a great five- to six-year run."

History Of Southern California Industrial

In the early and mid-1900s, El Segundo's Smoky Hollow, a 120-acre district, was home to heavy industrial and other manufacturing businesses and aerospace companies to support the wars.

But over time, the region changed. The blue-collar industrial and manufacturing companies began to leave.

In the early 2000s, city officials began noticing high vacancies and a total decline in the area.

But in the last seven years or so, Smoky Hollow began attracting a new generation of creative tenants — movie studios, architectural companies and other startups — due to El Segundo's proximity to Silicon Beach.

This renaissance has made a positive impact in the Smoky Hollow district, city officials said. Last year, the city of El Segundo officially rezoned the area as a creative office district.

Smoky Hollow's story is reflective of many former industrial areas in and around Southern California.

"Up to 30 years ago, much of Southern California was a manufacturing-based region," Strasmann said. "So the buildings were designed for manufacturing."

These buildings were 10% to 15% office and the rest of the space was for manufacturing and warehousing. The larger buildings three decades ago were half a million square feet.

Now those manufacturing businesses are gone and today's larger industrial buildings are 1.5M SF, or three times the size, Strasmann said.

"The buildings have evolved."

Today's Creative Industrial Office

From El Segundo to Burbank these industrial buildings are being transformed as creative office hubs.

After acquiring Backlot Burbank, a 12-building industrial business park in Burbank, BKM Capital Partners made creative upgrades to the 302K SF campus.

Several buildings have large-scale art murals on the outside honoring Burbank's long contribution to the film industry. More renovations are in store as old tenants move out and new creative tenants move in.

BKM Capital Managing Director of Acquisitions Brett Turner said the repositioning and tenant improvements is to cater to a new generation of employers and employees.

"What we've seen is a change in the employee base," Turner said. "Previously, before this transformation of a business model, the people working in the warehouse were typically low-wage workers, packing boxes and moving things around. But we've seen a heavy influx of additive manufacturing and 3D-printing companies with a lot of research and development.

These companies don't want lab space, Turner said. They want warehouse space.

Some of those employees are being paid more than six figures, he said.

"If you're a college graduate and you have your master's [degree], you have a vision of where you want to work," Turner said. "How do you go and work at an [older traditional] multi-tenant industrial space? So we make it cool and creative like what we have here with art installations and open offices so a person making that kind of money can feel comfortable coming in and out every day."

Most importantly, he said, this concept allows the business owner to be able to attract talent in a market with a low employment rate.

M-Rad, an architecture company based in Culver City, is designing Amazon's new Ring headquarters in Hawthorne. The property is being transformed from a warehouse into a creative office.

Visitors to the main building in the 62K SF creative industrial campus will be greeted by a coffee stand that will serve as a main entryway, 24-foot-high trees, terrace seating, a courtyard and plenty of communal space to interact and collaborate, M-Rad CEO and founder Matthew Rosenberg said.

"It’s meant to take you somewhere and transport you," Rosenberg said.

Rosenberg said as an architect there are a lot of advantages to transforming a warehouse to a creative office concept.

Warehouses typically have higher ceilings, solid foundations and much more room to be creative.

"It's a blank canvas," Rosenberg said, adding that traditional offices are limited by what could be built inside the building.

Even developers of larger industrial buildings are adding more amenities to their Class-A products.

Many Class-A industrial products have 32-foot to 40-foot clear height, higher-end finishes in the office space and high-end restrooms and break rooms. In some buildings, there is more natural light coming in, and there are outdoor picnic tables and barbecue areas, CapRock Partners Vice President of Asset Management Nicholas Ilagan said.

"It's all about attracting labor," Ilagan said. "It really comes down to separating yourself from the other products."

Guren, the CEO of Karney Properties, is amazed by how the industrial asset class has transformed over the decades.

She said there is still a need for traditional Class-B and Class-C warehouses and distribution centers, but she enjoys seeing how many of these old buildings have evolved.

"Industrial was the ugly stepchild of commercial real estate,” Guren said. "It was not a hot exciting area ... but now the stepchild is beautiful."