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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76 • September 2018 • Western Real Estate Business www.REBusinessOnline.com also afford to be selective on who they lease to and have the luxury to select credit tenants with the best financial strength." Eric Fikse, executive vice president at DAUM, has seen similar market fundamentals play out in this region. He cautions tenants to do what they can to secure the very few desirable spaces that do become available in this tight market. "This is a land- lord's market," he concurs. "Due to the lack of supply, ten- ants in this current market need to give themselves enough time to find a couple of buildings, have all financial infor- mation ready, have a good understand- ing from their brokers of what TIs and concessions are typical in your mar- ket, compare the features in the build- ing options, and then make a decision on which building would be the most cost-efficient and what would work for their type of operation." Fikse further elaborates that al- though this may be a landlord market, record-high demand also means that landlords are competing for the top tenants. "It is important that landlords be able to respond quickly to multiple proposals and understand potential tenant company financials," he says. "Get a good understanding from bro- kers regarding typical TIs and conces- sions on other deals being completed, and visit a potential tenant's current facility if possible to understand the operation and their needs." One way landlords can remain com- petitive, particularly in markets filled with older product, like Los Angeles, is to update their offerings. That's just what many value-add investors are doing, oftentimes creating a win-win situation with sellers who may have older facilities but know strong de- mand will result in a satisfying price tag. DAUM directed the sale of nine adjacent industrial assets in Central Los Angeles to three separate buyers for a total of $18.5 million in August. The properties were originally built in the 1950s and '60s within three miles of Downtown Los Angeles. Despite the vintage status, the assets are fully leased to tenants who benefit from the portfolio's major street exposure, sep- arate legal parcels with ample park- ing, dock-high and grade-level load- ing, and direct access to the 110 and 10 freeways. The new buyers, which include an owner-user that purchased a single building and two private in- vestors, plan to execute value-add renovations at the properties. "Our client owned this portfolio for more than 50 years and strategi- cally decided that now was the perfect time to sell, in order to capitalize on the high demand driven by the revi- talization of Downtown Los Angeles and the influx of major companies to the submarket," says James Vu, an as- sociate at DAUM who completed the transaction along with Michael Col- lins and Ben Spinner. "This transac- tion was a win for all parties involved. We were able to secure a strong price per square foot for the seller, despite the vintage of the buildings and lack of modern industrial features, and the buyers will benefit from the continued growth in the area." BKM Capital Partners is implement- ing a similar strategy with the $84.7 million acquisition of Backlot Bur- bank, a 12-building, 302,869-square- foot industrial business park in Bur- bank. The park is fully leased to 16 tenants with in-place rents currently 22 percent below market, the firm notes. BKM will institute a number of capital improvements, including new roofs, paint, and tenant and monu- ment signage, among other upgrades. Backlot Burbank is situated between Interstate 5 and State Route 170, di- rectly adjacent to the Hollywood/ Burbank Airport. "The fact that the asset is fully leased will provide immediate stabi- lized cash flow, allowing us to simul- taneously enhance value for investors through our comprehensive value- add approach," says Brian Malliet, BKM's CEO and co-founder. "The di- versification among tenants and the staggered rent roll will limit tenant rollover exposure compared to single- tenant industrial properties where rollover exposure is much greater." With ecommerce and port activities ramping up, those who can get in can enjoy the upside to building or acquir- ing a state-of-the-art facility in the In- land Empire or nabbing a value-add play in Los Angeles. "The ports of Los Angeles/Long Beach are main drivers of trade throughout the Western United States, and 2017 was their highest through- put record," Pharris notes. "Vacancy throughout Southern California, in- cluding the Inland Empire, is at an all-time low and it seems there will be no abatement in this shift to low in- dustrial vacancy, provided the overall economy remains healthy. We are also in the early stages of the ecommerce revolution and there is still plenty of room to run." n Credit RGA, Office of Architectural Design, Inc. CapRock will deliver Norco Business Park, a 425,000-square-foot, four-building project in Norco, in the second quarter of 2019. DAUM directed the sale of nine adjacent industrial assets in Central Los Angeles to three separate buyers for a total of $18.5 million in August. The properties were originally built in the 1950s and '60s within three miles of Downtown Los Angeles. BKM's Backlot Burbank is situated between Interstate 5 and State Route 170, directly adjacent to the Hollywood/ Burbank Airport. Fikse New Warehouse Development Pipeline and Rent Spreads Rent Spread for Under Pro-forma Market Rent Breakeven Rent for New Construction Construction for New Construction New Construction (Pro-forma vs. Markets (Sq. Ft., Millions) ($ PSF, Annual NNN) ($ PSF, Annual NNN) Breakeven) Chicago 9.3 4.56 3.20 43% Atlanta 19.4 3.25 2.35 38% Phoenix 5.4 4.80 3.55 35% Pennsylvania/ I-78/81 Corridor Los Angeles 2.4 9.60 7.57 27% Dallas/Ft. Worth 18.7 3.65 2.89 26% Houston 8.3 4.56 3.63 26% Inland Empire 19.6 5.80 4.68 24% Central NJ 9.8 5.95 4.90 21% Portland 1.8 6.24 5.25 19% Note: Rents within large and changingmarket geographies may vary greatly, even within submarkets. Source: CBRE Research, 2018 14.1 5.50 4.24 30%

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