Western Real Estate Business

NOV 2015

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

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www.REBusinessOnline.com Western Real Estate Business • November 2015 • 25 INDUSTRIAL DEVELOPERS CLAMOR FOR BIG BOX SPACE IN SUPPLY CONSTRAINED INLAND EMPIRE High land costs, lengthy entitlement processes and ferce competition from overseas can make big box industrial projects a challenge in the Inland Empire. But when it all comes together, it's like 'nir- vana,' according to ULI panelists. By Nellie Day I ndustrial developers big and small remain bullish on the Inland Em- pire, according to participants at ULI's "Small Box to Big Box: How Much Development Room Remains in the Industrial Market?" panel, held Oct. 22 at the Embassy Suites Ontario Airport. The panelists showed great enthusiasm for the region and its in- dustrial basin, but cautioned we may very well be at the tail end of the good times. "We're somewhere near the top of the cycle," said panelist Dominic Pe- trucci, CFO for CT Realty. "We prob- ably need to enjoy where we are on the mountain, but demand is the single biggest headwind we have to fgure out. Are you willing to make the 1-million- to 2-million-square-foot bets, or do you want to hedge with a 100,000-square-foot industrial proj- ect?" Panelists agreed the demand for big box space was still strong, particularly in the Inland Empire West submar- kets like Ontario, Rancho Cucamon- ga, Fontana and Chino. Finding land available for new big box industrial projects, on the other hand, was a dif- ferent story. "The Inland Empire is a big market but now it's a box," explained Thom- as Bak, senior managing director at Trammel Crow Company. "It's no longer thought of as the new frontier. Today's box is much more confned between the Cajon Pass, 215 Freeway and Moreno Valley. You efectively have to fnd land in that box." One hindrance to getting industri- al projects with more than 1 million square feet of the ground was the cost of dirt, which panelists cited as north of $30 per square foot. Then there's competition from Asian buyers and a fight to capital to contend with, not to mention municipalities that don't want to see their valuable city land swallowed up by sterile white boxes. "The challenges with Southern Cali- fornia are signifcant," Petrucci said. "We had a 100-acre site in the region. It was a perfect square. We could've done a few 2-million-square-foot box- es. E-commerce and logistics compa- nies would've loved it, but the frst meeting we had with the city, they said 'we don't want more warehouses and trucks. We want retail and hotels.' We said 'that's great, but that's not what the market wants.'" Nice Work (If You Can Get It) A few recent deals may have changed the tune for a city or two, however. Sares Regis Group recently purchased 150 acres of undeveloped land in Ontario, where it plans to build a 3-million-square-foot indus- trial distribution campus. The largest of the site's seven planned buildings was recently pre-leased to QVC. The 1.5-million-square-foot space will act as the video and e-commerce retailer's frst West Coast distribution hub. Panelist Terry Thompson, director of real estate services for the County of San Bernardino, said deals like this one point toward another trend in the Inland Empire's industrial market. "I don't know how much room we have to grow from an industrial per- spective, but I think it's a great time to be selling land that could be entitled for industrial," he said. "Shock pricing is occurring out here. QVC could've gone to Nevada, to any number of places, but they wanted the Inland Empire because of the value in labor, because it's the largest logistics hub in the country, if not the world, and be- cause companies recognize they need to be here even if they need to pay for it. At some point there will be some moment where the pricing stops, but right now, this is the place to be." Amazon appears to have the same mentality. The online retailer re- cently opened its ffth California fulfllment center in Redlands. The 700,000-square-foot center joins two other Inland Empire-based outposts for Amazon, including Moreno Val- ley and San Bernardino. The retail be- hemoth also announced plans in late October to hire about 100,000 seasonal employees for the upcoming holiday season. This is in addition to the 2,500 full-time jobs Amazon created when the Redlands center debuted. "We are proud to be hiring for more than 2,500 full-time jobs in California that ofer wages 30 percent higher than traditional retail stores and in- clude comprehensive benefts on day one, bonuses and stock awards," said Mike Roth, Amazon's vice president of North America operations, in a press release announcing the newest distribution center. "We have found great talent in the state and we're ex- cited to be growing quickly to serve our customers." Clearly a boon to his city, Redlands Mayor Pete Aguilar ofered an equally enthusiastic statement in the same re- lease. "My council colleagues and I are very excited that Amazon has chosen the City of Redlands to locate their new fulfllment center," he said. "And we are looking forward to the hun- dreds of new local jobs it will create. Amazon is among the innovative and successful companies that have recog- nized our city's attractive, business- friendly atmosphere, ideal location and skilled and diverse labor force. We are looking forward to Amazon taking its place as a valued member of our business community." Bak, who was part of the Trammell Crow team that managed construc- tion for the new center, said it was worth noting that much of Amazon's strategy focused on the city's fexibil- ity and viable labor force. "The Amazon deal was a big deal for all of us," Bak said. "There was tremendous cooperation when it came to buying and entitling the land. Amazon came in and cut a real estate deal very quickly, but they then went to their HR department and asked if they could get 2,500 employees. The city did a marvelous job underwrit- ing, and it was fascinating how the HR department was almost making the deal. Everybody thinks it's always about sales, but job creation is almost everything." Multinational conglomerate 3M had a similar situation when it outgrew its 270,890-square-foot Western region fulfllment center in Ontario. It ulti- mately sold the 40 acres to Trammel Crow Company, which was tasked with building a new 454,877-square- foot, built-to-suit facility that 3M agreed to lease back for 10 years. "The real estate guy for 3M few out to meet with the City of Ontario," Bak said, recalling the negotiation. "He only had one question. He said 'are you going to allow me to entitle this land to build this building?' It was a 10-minute meeting. The city said 'yes, you'll get your permits.' It was like nirvana. The deal happened. That's what these people want – they want to know the decision-makers are go- ing to support them." The panel was moderated by Joe Cesta of CBRE. Additional panelists included Jim Koenig, senior vice pres- ident of CBRE and Mike Lee, econom- ic development director for the City of Moreno Valley. n From left to right: Joe Cesta, Terry Thompson, Dominic Petrucci, Jim Koenig, Thomas Bak and Mike Lee. The 1.5-million-square-foot space in Ontario will act as QVC's frst West Coast distribution hub.

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