High Demand And Lack Of New Product Has Industrial Space Values And Rents Soaring
Rental rates for industrial space in Orange County escalated 7% over the last year, and industrial sales are up even more—a whopping 11%. That's why we're thrilled to host Bisnow's Orange County Industrial and E-Commerce Real Estate event on Jan. 26, beginning at 8am at the Hyatt Regency Orange County.
Among our panelists is director of acquisitions for locally based industrial developer Western Realco Jeremy Mape (here on a ski trip with daughters Ceci and Livi), who tells us a significant driver for the escalation of values within OC’s industrial market is lack of new product, because it’s increasingly difficult for developers to find an infill site of 10 acres or more. The overall OC vacancy rate for industrial space is just 1.9%. “We’re buying up surplus land and older buildings and demolishing them to build new product.”
Jeremy says all types of industrial businesses are pushing the demand for industrial real estate development, but new “click to order” e-commerce firms like Amazon are a welcome addition to the market’s diverse industry mix. He explains Amazon has a large distribution facility in the Inland Empire but is establishing smaller, local fulfillment centers near customers to provide same-day and next-day delivery.
Jeremy notes many businesses want new state-of-the-art space because it provides a number of superior attributes over older product: higher clear heights, generally 30 feet vs. 24 feet for older buildings; better dock access and maneuverability for trucks; and EFSR sprinkler systems which, while required for storage of certain types of commodities such as plastics and apparel, are desired by many building owners and tenants regardless of their use because of their advanced fire suppression system. The newer buildings also comply with California Green, the state’s sustainable building standard, which is about on par with a basic LEED certification.
Western Realco, which generally develops facilities on spec and focuses solely on SoCal markets, strives to design and construct buildings that are adaptable to all types of industrial users. Based on its belief that the OC industrial market is and will stay strong, the firm has three projects underway: a 220k SF facility in Brea and two projects in Fullerton, one 180k SF and the other a business park with nearly 900k SF. This is in addition to recently completed projects of 215k SF in Anaheim and 430k SF in Brea (pictured).
In fact, Jeremy notes besides his company’s projects, there are few industrial projects in the works. Panattoni Development Co completed a huge industrial complex called Anaheim Concourse (pictured) in 2014 on 120 acres of Boeing Co’s 260-acre campus in east Anaheim but nearly all space has been sold or leased.
According to a Transwestern report currently a little more than 1M SF is under construction in three projects, which includes 482k SF in the third phase of Anaheim Concourse by Panattoni and Clarion Partners, 367k SF by Pacific Industrial and Clarion in Brea, and about 173k SF by Snyder Langston in Fountain Valley.
The majority of product coming to market has been sold, rather than leased, to users, Jeremy says, while noting that on their projects the ratio of buyer interest vs. tenant leases has been 5 to 1. “In today’s interest rate environment, combined with the availability of SBA financing, users can often buy a facility and end up with a mortgage payment lower than prevailing rents” he adds, noting that the majority of buyers are successful local and regional businesses.
Despite the lack of adequate building sites, Jeremy predicts that developers will continue to build as long as there is demand, but the cost will increase significantly because developers will need to buy older industrial facilities and demo them to build new. Fortunately, OC’s strong industrial market continues to attract investors, because given its dynamics, they perceive there is very little risk, he notes.
Hear more at Bisnow's Orange County Industrial and E-Commerce Real Estate event on Tues., Jan. 26, beginning at 8am at the Hyatt Regency Orange County, 11999 Harbor Blvd in Garden Grove. Sign up here.