Brandon Birtcher Goodman Birtcher’s Brandon Birtcher said the industrial sector has undergone a profound change in size and design of buildings due to e-commerce.

COSTA MESA, CA—Industrial distribution and warehouse buildings of all sizes—particularly last-mile delivery—represent the future of this sector in the Orange County market, said panelists at yesterday’s RealShare Orange County here. Speakers on the panel “OC Development: Navigating an Active Pipeline” said e-commerce has changed the sector profoundly from its former incarnation.

When moderator Eric Hinkelman, CEO of Voit Real Estate Services, asked panelists what they’re building, repositioning and buying now, Brandon Birtcher, CEO | North America for Goodman Birtcher, said the industrial sector has undergone a “profound change.” His firm’s REIT portfolio now contains more large (500,000-square-foot to 1.5-million-square-foot) buildings, and with regard to design, “We’re still discovering if you can get the rent” for certain-sized buildings.

Bill Halford, president and CEO of Bixby Land Co., said his firm “tripped into creative-office space in the Silicon Valley in 2009” and has repositioned 20 buildings in that market into true creative space. “We’re typically buying at a fraction of replacement cost and investing capital in repositioning,” which takes less time to complete than ground-up development. You’re left with a “top-tier product with a price point that’s less than new development.” Halford admitted that there has been somewhat of a decrease in sales price for these properties in the Silicon Valley market as the cycle begins to come to a close there.

Dominic Petrucci, COO/CFO of CT Realty Investors, said in the case of industrial space, “Now we are retailers,” with regard to last-mile-delivery buildings. These buildings require more parking space for both delivery trucks and consumer cars. Peter Moersch, VP leasing for the Irvine Co., said his firm is seeing a lot of people buying online and picking up merchandise at stores, which is why more parking is needed for cars and trucks. “By creating amenities at each point of the product, it makes the project more desirable.”

Hoonie Kang, a partner with Kearny Real Estate Co., said his firm is “more mindful now of which point in the cycle we’re in. We are bullish on industrial; we’re much more selective on the office side.”

When asked what they like about the Orange County market, Kang said Orange County is a “gateway market. Adaptive reuse is new to this market, but Orange County has every plus that L.A. has, with better school options. “A lot of tenants are drawn here because of that.” Moersch said his firm has had “high sales in markets with good schools. We’re creating a great home base for home buyers to move into.”

While 90% of CT Realty’s business is outside of Orange County, “we are repositioning buildings here,” said Petrucci. “Landlords are doing things here for all the right reasons.”

Halford said in addition to good schools, Orange County has a “balanced economic environment” versus San Francisco. “We try to find a place in the cycle where there is no new development; we have less invested in San Francisco now. What we don’t like about Orange County is there’s not a lot of old stock to reposition in the Airport area where we focus, but there is a limited amount of new development here.”

Birtcher said he sees a more “profound change in Orange County on the real estate side than other markets. We will see opportunities in repositioning business parks; it’s going to be an amazing opportunity.”

E-commerce has affected the panelists’ decision-making process dramatically, they said. Kang explained, “Many times, cities have a preference for retail” over industrial development, but “we have convinced the city that there’s enough sales tax off industrial development to justify it” thanks to e-commerce. Petrucci said his firm’s focus has shifted to a port-centric one because of e-commerce, and Moersch said last holiday season one-third of consumers relied on “click and collect”—buying online and picking up in stores—which shoes “we don’t need the giant superstore anymore. We will see smaller stores, and we will be more dependent on warehouses and shipping than ever before.” The problem in the future may be traffic due to the transportation needs that e-commerce produces. “Real estate has to respond to that,” understanding shorter delivery times.

Panelists said the major challenges to developers in this market include industrial entitlements losing out to multifamily, dealing with manipulative EIR review panels that only want cash or union contracts, unreal rent-growth yield expectations, rising labor and materials costs for construction and cities’ overstrained budgets. Most agreed that we are in the later innings of this cycle.