How Investors Are Profiting In Orange Co’s Tight Industrial Market
The transformation of industrial space to creative office has dramatically reduced Orange County’s industrial supply. Lack of available land to build new industrial facilities poses challenges for industrial real estate investors, whose only options for creating more space is to acquire and modernize outdated facilities or replace them with new state-of-the-art product.
Allen Matkins partner Pamela Andes (center, chatting with Darby Cutler and Tony Ward from Roux Associates) moderated the acquisitions panel at Bisnow’s Orange County Industrial Summit on Feb. 26. She kicked off discussion by asking panelists to describe their firms' business strategies and the challenges posed by current market conditions.
Rexford Industrial’s co-CEO Howard Schwimmer (center, flanked by Jonathan Pharris at left, and Brian Gagne), whose company is a value-add acquisitions investor, said industrial inventory levels climbed a little with the recent slowdown in demand. Nationally, there is oversupply, but demand still outpaces supply in SoCal, he said. About 1M SF of industrial space was delivered in OC during the past year; 1.3M SF of existing inventory was converted to creative office and multifamily uses, he explained. As a result, industrial rents grew by 7% overall, but rose 15% in the north county.
CapRock Partners president Jonathan Pharris said his company allows the market to dictate use of acquisitions. “We take assets and bring them to what’s happening in each market,” he explained, noting industrial acquisitions in the John Wayne Airport submarket are transitioned to higher and better uses, because that’s the trend there. Jonathan said 70% of buildings have been transformed to creative office and the rest to biotech. He said this approach applies across the spectrum. In another case, assets were sold as industrial condos because most tenants wanted to own their own space.
Brookfield Logistics Properties’ SVP and regional manager Brian Gagne said, “It’s hard to deny what's happening in the global market—credit risks are flowing through the system. On the flip side, US real estate is one of the best bets in the world, and foreign capital is flowing here.” While the cycle is getting a little “long in the tooth,” he said the global REIT would create "Class-A properties and bigger boxes, as there is a flight to institutional quality."
Pamela also asked panelists about their plans for the coming year.
Howard: “We’re buying more than we will sell this year. We’re looking for buildings with excess land because of the scarcity of land and buildings with a typical low-cost finish opportunity."
Jonathan: CapRock is looking ahead to acquisitions that generate cash flow. “The market is shifting, and we don’t want to be caught mid-cycle with low cash flow." His firm is looking for opportunities that create value without a large capital investment.
Brian: “We’re looking for distressed properties, and skating with our head down, rather than head up. We can’t chase every deal, so have a filter that eliminates a lot of properties. We look at how to exit within four years. We’re not trying to grow a portfolio; we buy and sell.”