Western Real Estate Business

JUN 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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44 • June 2018 • Western Real Estate Business www.REBusinessOnline.com RETAIL DRIVES INDUSTRIAL THROUGH MUCH OF THE WESTERN U.S. are at historic lows and construction in the Western United States remains in check." Michael Collins, vice chairman of DAUM Commercial Real Estate Ser- vices in Los Angeles, has witnessed a similar trend in his market. He notes industrial assets in LA typically sell for $140 per square foot to $200 per square foot, with a vacancy rate of less than 2 percent in Southern California. " D e v e l o p a b l e land is becoming more scarce and the Los Angeles Coun- ty industrial mar- ketplace remains very vibrant," he notes. "Lease rates throughout South- ern California have reached an all-time high and sales val- ues are at unprecedented highs, with actual prices based on building age, location, functionality and amenities." Those looking to cash in on in- dustrial should pause for a moment, however. Collins goes onto note that investors trying to enter the market are challenged by low cap rates in the 4.5 percent to 5.5 percent range. Some are also being converted into higher- use assets, such as office and that ever- popular multifamily. Industrial Needs Retail Areas like Los Angeles might be los- ing a portion of their industrial sup- plies to higher uses, but other regions are actually expanding their industri- al segment through the conversion of vacant big box retail spaces. "We are currently talking to a lot more groups that would like to do conver- sions — particularly with retail proper- ties," says Jeremy Ballenger, senior vice president of in- dustrial and logis- tics in CBRE's Den- ver office. Red & Jerry's, a sports betting lounge and family entertainment cen- ter, operated for 22 years at 1840 West Oxford Ave. in Sheridan, Colo., just south of Denver, before closing for good in March 2017. "After the property sat vacant for over a year as retail, Cadence Capital got the property under contract, and as soon as it was marketed as industri- al they signed a long-term lease with Ferguson Enterprises during their due diligence period," Ballenger notes. The space underwent a complete renovation, transforming into a distri- bution and showroom space. Cadence gutted the property, added two small showrooms, four new dock doors and a new drive-in door. The conversion also received LED lighting, new sprin- klers and upgrades to the parking lot to create a Class A size truck court. The property also offers 240-foot bay depth and 24-foot clear heights. Cadence Capital purchased the as- set in 2017 and sold it to LBA Realty for $14.8 million this past April. The South Central submarket boasts a 3.4 percent industrial vacancy rate, mak- ing this submarket one of the lowest rates in metro Denver, according to Ballenger. This, combined with com- pressing cap rates, is driving up the area's infill property values, paving the way for industrial sales and leases of this caliber. "We were drawn to the real estate because the site featured a unique blend of industrial and retail charac- teristics that created the opportunity for us to deliver increased value to our tenants," says Lucy Dinneen, man- aging director of Colorado and the Northwest for Cadence. "The site cre- ated a brand-building opportunity for our clients — even industrial clients — because of the great visibility on a high-trafficked corridor within the metro market. Our clients were able to get the industrial utility and pricing of an industrial space, but with added brand-building benefits of retail, and our buyers have a fantastic asset with future potential as infill mixed-use, industrial or retail as the future dic- tates." Redevelopment Renaissance John R. DeGrinis, senior executive vice president in Colliers Internation- al's North Los Angeles office, believes we may see additional industrial op- portunities emerge from the retail sec- tor as shop space requirements con- tinue to evolve. "We are witness- ing significant change to our brick- and-mortar retail locations," he says. "We believe this po- tential overbuilding in the retail arena will also provide opportunities for redevelopment as it appears the retail world may be changing." The costs, lack of land and time- frame associated with ground-up new construction can also be prohibitive to many industrial investors and users. "We believe that redevelopment of functionally obsolete properties will be an opportunity for developers to build needed product," DeGrinis continues. "In today's hyper-charged market, it is difficult to conceive scrap- ing buildings in favor of new ones. Values today prohibit this." Industrial Property Trust (IPT) exe- cuted this strategy when it purchased a 104,000-square-foot industrial asset on Susana Road in the Compton, Ca- lif., submarket of Rancho Dominguez for $12 million in January 2017. The REIT spent $2.5 million modernizing the facility, portions of which were built in the 1950s. Specific areas of the building were demolished to expand the truck court, offices and old glaz- ing were removed, dock-high loading doors were added and the outdated office component was replaced by a 10,000-square-foot, two-story office space. The newly renovated facility was then leased to global supply chain so- lutions provider Apex International for a total consideration of $10.5 mil- lion. The 10-year lease commenced May 1. "The lease to Apex International continues to prove the strength of this investment for our client," says Col- lins, who, along with Jordan Lara, rep- resented IPT in the lease transaction. Collins notes the asset is currently valued at about $20 million. "The initial rent for the Susana Road transaction was $0.735 triple- net, with annual 3 percent increases," he continues. "Functional, 20-year-old buildings, or upgraded buildings in the larger size ranges are achieving rents near $0.75 triple-net. These larg- er buildings are leasing at rates near $0.85 triple-net when in new, state-of- the-art condition." CapRock Partners is taking on simi- lar projects in equally supply con- strained San Diego. The company purchased nearly 250,000 square feet of industrial space in the area through INDUSTRIAL from page 1 Collins IPT spent $2.5 million modernizing a 104,000-square-foot industrial asset on Susana Road in the Compton, Calif., submarket of Rancho Dominguez. The facility was then leased to Apex International for a total consideration of $10.5 million. Ballenger Courtesy Paul Brokering Photography Ferguson Enterprises signed a long-term lease for an industrial conversion that was formerly home to Red & Jerry's, a sports betting lounge and family entertainment center near Denver. DeGrinis Portions of the Susana Road facility were built in the 1950s. Specific areas of the building were demolished to expand the truck court, offices and old glazing were removed, dock-high loading doors were added and the outdated office component was replaced by a 10,000-square-foot, two-story office space.

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