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Industrial Developers Chase Core, Find Value-Add

Los Angeles Industrial

The tight industrial market is causing headaches for industrial developers. (Any time you have to factor earthquakes into your plans, you could use an aspirin.) Last week at our Bisnow Industrial Summit, our expert panel of owners and developers shared their individual coping strategies.

Prologis' Southwest president Kim Snyder talked about the ways that e-commerce is affecting the design of industrial buildings. Guidelines include lots of parking for large numbers of pick and pack employees; two or three trailer parking spaces per truck door; 40-foot clear heights, and multiple mezz levels. Designing those features into a spec building to attract e-commerce users can get pricey, but if you don't, you'll miss out.

With core buyers moving into value-add, Panattoni Development partner Mark Payne says the company is out of the value-add space—ground-up development seems to be its niche right now. As for competition from owner-users, Mark says the sites he's chasing are either too complex for them to figure out, or an owner-user may get a site under contract, then decide it doesn't want to deal with the hair on it.

Dedeaux Properties Brett Dedeaux says the developer is doing more ground-up to achieve returns. The company just sold a 90k SF building in Vernon, which hasn't been its MO, because lease rates haven't moved in some of the infill areas the way he would like. Comparing the sale price to what he could get on a lease rate, it would take 15 years to match the same returns.

Oltmans Construction VP Gerald Singh says 13M SF of tilt-up product has been completed in the Inland Empire through June, and another 13M SF is under construction. Looking at what's being entitled and what's planned, he sees 60M to 70M SF on the books right now for the coming years (provided the economy cooperates). Construction prices went up 4% to 5% last year, and a similar increase is trending for next year.

Noting that we're in earthquake country, Saunders Commercial Seismic Retrofit prez Steven Saunders says any building built before 1997 is a candidate for a seismic retrofit. The 2003 San Simeon earthquake set a precedent for risk—two women were killed when a building's parapet fell, and the owner, who knew the building was deficient, was hit with a nearly $5M judgment.

Our moderator, CBRE senior managing director Kurt Strasmann, says that of the 51 industrial markets the firm tracks nationally, LA's by far is the biggest and best. LA's got the lowest vacancy rate in the nation, OC is second lowest, and the IE is fourth lowest.

Kim says Prologis is going value-add because he can't find core—he hasn't seen a brand new, clean, rectilinear box available at a good cap rate in three years. Mark says Steven's seismic-retrofitting process gives value-add properties a Good Housekeeping seal of approval for a pension fund buyer. Brett says one way that Dedeaux Properties was able to do a value-add deal this year was by buying the LA Food Center in the firm's refrigerated niche. Gerald says costly issues that buyers often overlook include ADA compliance and fire sprinkler density; investors also should ask the local fire marshal about the allowable commodities that can be stored and to what height.