4/23/2015 Where’s the Land for Industrial Development? Daily News Article GlobeSt.com You are here: Home > Daily News > Where’s the Land for Industrial Development? Last Updated: April 22, 2015 EXCLUSIVE Where’s the Land for Industrial Development? By Carrie Rossenfeld | Orange County New Event! Expand your SoCal network at RealShare San Diego on May 28. ORANGE COUNTY, CA—With Southern California lease rates trending upward and some markets back to peak pricing, it would make economic sense for industrial developers to build now—if finding developable sites wasn’t such a large problem, experts tell GlobeSt.com. We spoke exclusively with experts in Orange County as well as other parts of Southern California about the industrial space crunch and how developers are dealing with it. Read our full feature story about industrial development in Southern California in GlobeSt.com’s sister publication Real Estate Forum. All of the region’s major industrial markets are feeling the industrial space crunch. In February, JLL released a report showing that large industrial blocks of greater than 100,000 square feet in Orange County have diminished by more than half since 2008, and Voit Real Estate Services reported that as of midfirst quarter, Holdner: “Finding land that is the vacancy rate for Orange County had decreased 19.78% over the last 8.5 quarters to 3.65%, with the priced correctly, rising availability rate down to 5.53%. In San Diego, industrial rents are continuing to climb, while the number of development costs and the ability annual lease transactions has decreased fairly steadily since Q3 2013, according to Voit. The same is true of to obtain financing are the major the Los Angeles market, which saw 803 industrial lease transactions in Q2 2013, but only 457 in Q4 2014, challenges to industrial and the Inland Empire—a highly desirable market, particularly for bigbox industrial users—has been showing development.” a similar trend, Voit reports. It’s clearly a landlord’s market, but what are users bent on a Southern California address—and developers looking to get a piece of the pie there—supposed to do? “Developers are going to be looking closely at any and all infill properties within the Los Angeles basin,” Tim Joyce, SVP, capital markets, for PM Realty Group, tells GlobeSt.com. “Most folks would consider 2014 a banner year in absorption at more than 18 million square feet leased in the L.A./I.E. marketplace,” according to PMRG and CoStar industrial reports. “However, at the end of fourthquarter 2014, more than 14 million square feet was under construction with over 20 million square feet expected to be delivered in 2015. Look for rents to have a small increase in 2015 with net absorption to be in the 13millionsquarefoot range. Vacancies will end in the low6% range, a small increase from the close of 2014.” Finding land that is priced correctly, rising development costs and the ability to obtain financing are the major challenges to industrial development in Southern California, Jerry Holdner, VP of market research for Voit Real Estate Services, tells GlobeSt.com. “There’s also heavy competition for land sites with apartment developers, which is creating higher land prices.” For the sites that do get developed, Brett Turner, director of acquisitions for BKM Capital Partners, tells GlobeSt.com he expects to see continued growth in bigbox singletenant development. “As yields contract, eventually developers will start to build smaller, multitenant business parks in search of return. However, we do not expect this to occur for several years.” Despite the difficulties developers face in this market, construction financing is occurring, Gary Tenzer, principal and managing director for George Smith Partners, tells GlobeSt.com. “We are currently working with a number of industrial developers to secure construction financing for new Southern California projects. As a result of the currently strong leasing market and low vacancy rates in the region, we have been able to secure these developers attractive longterm, fixedrate, permanent financing at unprecedented low rates.” Given the difficulty of finding infill development sites, the Inland Empire has served as the release valve for Southern California industrial requirements and has increased its industrial base at an average of 13 million square feet per year over the past 10 years, from 400 million to more than 530 million square feet, Chris Macke, managing director, research and strategy for American Realty Advisors, tells GlobeSt.com. “While these numbers may appear ‘staggering’ at first glance, in the context of the entire Southern California industrial base it’s less than 1% per year, he says. Macke adds his firm expects to see continued interest in infill sites, but, with land prices at $70plus per square foot, larger tenants are forced to look further east. “The western I.E. is quickly becoming infill, and the I215 corridor is not a pioneering location anymore. We expect to see twoplus facility distribution systems in the I.E. East where bulk storage and smaller infill warehouses are used to reach the end users quickly and efficiently.” Stephen Batcheller, a partner at Panattoni Development Co. Inc., tells GlobeSt.com that while the I.E. East has available land, the supply of finished sites is restricted due to the length of time required to obtain entitlements and the overall lack of infrastructure in place (i.e., roads, storm drain systems, sewer systems), which must be constructed prior to the delivery of finished projects. “As a result, most of the new Southern California http://www.globest.com/news/12_1094/orangecounty/industrial/WherestheLandforIndustrialDevelopment3572101.html 1/2 4/23/2015 Where’s the Land for Industrial Development? Daily News Article GlobeSt.com industrial development promises to occur in the I.E. East, with supply is likely to come on line at a moderate pace and hopefully in equilibrium with tenant demand.” SIOR Live runs through May 7. Click here to get all the latest news surrounding SIOR's Spring World Conference. About Our Columnist Carrie Rossenfeld is a reporter for the West Coast region of GlobeSt.com and Real Estate Forum. She was a trademagazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectualproperty licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a homebased business. Bio | Email About ALM | Customer Support Copyright © 2015 ALM Media Properties, LLC. All rights reserved. http://www.globest.com/news/12_1094/orangecounty/industrial/WherestheLandforIndustrialDevelopment3572101.html 2/2