Guthrie: u201cResidential buyers are willing to take the entitlement risk for several years because there's so much profit potential.u201d

IRVINE, CA—Competition from residential developers for sites zoned for industrial use is on the rise, executives tell GlobeSt.com. We wondered: is this a good thing or a bad thing?

“We’re seeing unique changes as an industrial developer in that there is an increase in residential buyers competing against us to buy industrial properties,” Rob Guthrie, CEO and founder of Guthrie Development, tells GlobeSt.com. “They’re willing to take the entitlement risk for several years, working in a city that may oppose rezoning from industrial to residential, but there is so much profit potential. We’re finding that with a lot of these industrial properties, we’re chasing, we’re competing against the residential buyers.”

Guthrie says formerly his firm had been competing with multifamily investors until that market began to cool with the for-sale housing market picking up. “Now it’s more for-sale guys than multifamily competing for our properties. Brokers in our community are seeing that, too.”

Guthrie has still been able to purchase industrial sites in Orange County. As GlobeSt.com reported in July 2013, the firm acquired its first property in several years: a two-building, 61,155-square-foot warehouse and manufacturing facility at 1295 W. Lambert Rd. in Brea, for $3.4 million. The new owner subsequently foreclosed on the property, taking control of the asset. At the time, the firm said it was looking to acquire existing industrial properties on developable land and had developed 1.9 million square feet in Orange County.

Zach Niles, SVP industrial real estate advisory and brokerage operations with JLL, tells GlobeSt.com the competition trend is actually a cyclical phenomenon that occurs when demand is high and inventory is low, like we are currently experiencing in Orange County. “This arises every time the market comes back. Residential developers begin to compete with industrial buyers at large—whether they’re developers, investors or owner/users. It usually happens with industrial properties that sit on the periphery of a residential area or have residential adjacency.”

Niles adds that he saw this occur recently with Guthrie Development on a Brea site where there was existing industrial product and interest from residential developers. “Interest doesn’t come without its snags, so to speak. A residential developer will pay an attractive price, but the escrow period can take a year or two years because it takes that long to get the entitlements. If they feel strongly that they will get the entitlements, they will acquire the property pre-entitlement at a lower price but with the stipulation that they do get the entitlement.”

While it sounds logical that this competition would create problems for industrial developers in a land-constrained market where inventory is scarce, Niles says he doesn’t see it as such. “The only type of property the residential developers are going after are on the periphery, so an industrial developer or investor who has this property should open it up to another buyer use. It’s the evolution to higher and better uses.”

Sean Rawson, a principal with the Waterford Group, which focuses on urban-infill redevelopment, tells GlobeSt.com this competition actually represents an opportunity for industrial developers because they have an eager buyer pool willing to pay large amounts for available sites. “We’re willing to sell off to large home builders. They have a large appetite to fill up their pipelines. We have targeted industrial, retail and office projects whose highest and best use has transitioned over to residential development.”

Rawson adds that most of the industrial buildings he has seen are 30+ years into their lifecycle and have outlived their life as industrial buildings. “You could come in and scrape them and build a new industrial building, but it doesn’t always make sense. We bought a 50-year-old building in Costa Mesa, a former aerospace site, and we could have scraped and built either ground-up industrial or residential, but we knew the city wanted to see residential there.”

Much of the industrial base in West Costa Mesa, in particular, is older stock built before the city had done a comprehensive land plan, says Rawson. “Just in the last downturn, the city said most of these buildings are now obsolete. They no longer want an industrial base here. Owner/users can keep their current use, but residential buyers will provide impetus for them to sell it. In the last two years, we’ve been starting to see a lot of those buildings turn over. Residential and industrial are starting to rub up against each other in urban markets, and it’s not detrimental.”