John McCloud is editor of Industry Property Journal, from which this article is excerpted.

Newport Beach, CA—The Koll Co. is increasing its portfolio by more than 50%, moving into three new markets and considering expansion into several more, a company executive says. The firm is adding about 1.7 million sf to the 3.2 million sf it already owns in Southern California, Arizona and Nevada. The properties include two light industrial parks in Utah--the 119,592-sf Broadbent Business Park in Salt Lake City and the 78,400-sf Redwood Business Park in West Valley--and similar complexes in Colorado and Texas.

Koll managing partner Alan Airth says the company is considering potential acquisitions in the San Francisco Bay Area and the Pacific Northwest. The company is looking exclusively at multi-tenant industrial business parks that feature 1,000-sf to 3,000-sf units with small amounts of office space in the front and warehouse space in the rear. Typical tenants are young companies making their first moves out of their owner's basement or garage, he adds.

Airth says multi-tenant developments are attractive because they limit the company's exposure to a single large user or single business category. "If one tenant moves out or a particular area of business has a downturn, 30% of your space won't suddenly become vacant," Airth notes. In addition, there's rarely a shortage of tenants, thanks to a steady stream of entrepreneurs eager to expand their small businesses.

What's more, demand remains consistent even during economic downturns because many larger companies downsize into smaller spaces and only minimal improvements are generally required to make spaces suitable for new tenants. "People don't expect makeovers for this type of space. They're basically leasing shells," he notes.

The downside, Airth notes, is the absence of credit tenants, which makes financing difficult to obtain and more expensive. In addition, this type of property is more management intensive than typical industrial projects because of the larger number of tenants. "Our model is based on so many tenants per manager, not so many sf per manager," he says.In the past, Koll developed most of its own buildings. However, at least for now, it has switched to acquisition because current rents are too low to justify current land and building costs. "Nobody is developing this product type right now. We can buy developments for much less than replacement cost," says Airth. "At some point, rents will catch up, but that time is a ways off." He pegs cap rates at anywhere from 6.5% to 8%, depending on the age and location of the particular property.

In markets like Los Angeles and Phoenix, the product faces competition for tenants from developers of industrial condos. However, Airth says competition is not a problem in Dallas, Denver or Salt Lake City and not likely to become one. "I don't expect to see condos sprout in those markets because the premium for owning in those areas represents a significant increase over renting. Rents have to be quite high for owning to seem like a viable alternative," he says.

Koll also competes with condo developers for product, although Airth says the greater obstacle is the need to go after properties one at a time since Koll is one of only a few investors that has a portfolio in this category. Most properties are owned by small investors or family trusts, which means Koll has to develop relationships with a large network of brokers in the markets it targets to get the first shot at the properties.

Despite the effort required to find opportunities, Airth says Koll plans to keep growing. "We want to continue to grow at a pace that's manageable," he says. "Exactly what that pace is depends how quickly we can get management in place."

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