Western Real Estate Business

SEP 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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74 • September 2018 • Western Real Estate Business www.REBusinessOnline.com The study further notes the signifi- cant gap between pro forma rents and breakeven rents in these markets, with pro forma rents exceeding breakeven rents by 27 percent in Los Angeles and 24 percent in the Inland Empire. "This huge gap implies that if de- mand slows and the market cools a bit, there's still a lot of cushion there," says David Egan, CBRE's global head of industrial and logistics research. "This means that the development market is quite healthy, underwriting remains conservative, projects under development should preform quite well and the incentive is there for con- tinued development." Developing a Winning Strategy As might be expected, much of the allure surrounding these two regions has to do with geography. Southern California is home to two of the na- tion's largest ports, a 2,000-mile net- work of BNSF railways, and dozens of highways that allow goods to swiftly move in and out of the state. Transpor- tation times and sound infrastructure are nothing to sneeze at nowadays, as many consumers expect their pack- ages to arrive within a few days of placing their ecommerce orders. This has made Los Angeles and the Inland Empire key hubs for last-mile logistics providers. "Consumers' changing shopping habits, coupled with the thriving Southern California economy, is fuel- ing massive growth in the area's in- dustrial market," says Jonathan Phar- ris, president of CapRock Partners. "Forty percent of all industrial lease deals in Southern California and 60 percent of deals in the Inland Empire now have a connection to ecommerce. As consumers' shopping patterns shift to online, it negatively impacts retail real estate but is a positive tail- wind for industrial real estate." The ecommerce revolution has in- spired Pharris and his team to act fast. CapRock has accelerated its last- mile logistics strategy by developing three properties in the Inland Empire that contain eight industrial buildings for a total of nearly 900,000 square feet. The company is constructing the single-building, 140,000-square- foot Temescal Valley Commerce Cen- ter in Corona, scheduled to open in fall 2018; Serrano Business Park, a 327,000-square-foot, three-building center in Jurupa Valley that is slated for completion early next year; and Norco Business Park, a 425,000-square-foot, four-building project in Norco open- ing in the second quarter of 2019. The Inland Empire was a logical choice, Pharris notes, as it boasts more opportunities for ground-up develop- ment. This allows CapRock to inte- grate choice amenities that will hope- fully carry its buildings into the next phase of functionality. "The Inland Em- pire has the largest number of state-of- the-art industrial facilities," he says. "Despite low vacan- cy in coastal mar- kets, many of these industrial buildings have some func- tional obsolescence, such as low clear heights, poor loading, tight column spacing, small speed bays or anti- quated fire sprinkling systems. On the other hand, most of the buildings in the Inland Empire are new construc- tion and institutional quality with the most advanced features, including 40- foot clear heights, wide column spac- ing, excess trailer parking, etc." True to form, Serrano Business Park will include 32-foot minimum door clearances, 4,500 square feet of execu- tive office space positioned between the three buildings, and ample se- cured parking and truck courts. Each building will also feature 2 percent prism skylights that can provide up to 4,000 amp, 277/480 volt electrical power. With any luck, CapRock will end up in a position similar to Stirling Development, which has developed nearly 4.5 million square feet of Class A industrial warehousing and manu- facturing facilities at Southern Cali- fornia Logistics Airport (SCLA) in Victorville. The 8,500-acre multimodal freight transportation hub is home to Plastipak Packaging, Arden Compa- nies, Dr. Pepper / Snapple, Red Bull, Mission Foods, Sparkletts, General Electric, FedEx and Newell Brands, which signed its second lease expan- sion at the center in July. The parent company of Rubber- maid, Mr. Coffee, Food Saver, Yankee Candle and Sharpie originally leased 407,600 square feet in 2006, though it now occupies more than 1 million square feet at SCLA. Stirling will soon break ground on the 466,255-square- foot expansion at Distribution Centre 3 (DC 3) where Newell is expected to take full occupancy in March 2019. Once complete, DC 3 will feature 78 dock high doors with a 36-foot clear height. Lease terms will have New- ell in the new building through 2029. SCLA includes a 2,500-acre commer- cial and industrial complex entitled for 60 million square feet of develop- ment, which Dougall Agan, Stirling's president and CEO, believes will come in handy in the ecommerce era. "We have experienced ongoing de- mand to build new facilities in SCLA for the last 10 years," he says. "The economic growth, logistical advan- tages and low cost of occupancy make the High Desert one of the best dis- tribution locations for major corpora- tions in Southern California." Renewed Interest Competition for new space is fierce, but that doesn't mean lease renewals or expansions are a walk in the park, either, as Pharris points out. "If a tenant has a lease already, they need to be cognizant of their lease ex- piration and ensure they renew when there is a minimum of 18 months re- maining on their existing lease," he advises. "Lease rates have increased drastically over the past several years, so when companies look to renew their lease, many will have sticker shock." Even this proactive strategy may not spell success, however, in markets as hot as Los Angeles and the Inland Empire. "On the other hand, landlords have the ability to be patient since many landlords believe that lease rates will continue to increase in the near fu- ture," Pharris continues. "They do not necessarily want to lock in a lease rate today if the lease does not expire for more than a year. Landlords can LAND COSTS, CONSTRAINTS DON'T RESTRAIN LA, IE INDUSTRIAL MARKETS INDUSTRIAL from page 1 Pharris The single-building, 140,000-square-foot Temescal Valley Commerce Center in Corona will debut in early fall 2018. Stirling Development will soon break ground on the 466,255-square-foot expansion at Distribution Centre 3 in Victorville where Newell is expected to take full occupancy in March 2019.

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