IRVINE, CA—Projects like Dyer Road and Beckman Business Center are rare, but they are good examples of investors finding creative ways to redevelop or renovate older and functionally obsolete industrial buildings, JLL EVP Nick Carey tells GlobeSt.com. According to the firm's Q3 industrial report, a 495,000-square-foot multi-building development planned at Dyer Road and Tech Center Drive. in Santa Ana, CA, will be the largest industrial development in the Airport Area so far this century.

The report also revealed that the West and North County submarkets recorded Q3 positive net absorption of 514,498 and 438,972 square feet respectively and that investors are now willing to pay more than owner-occupiers, which historically has not been the case.

We spoke with Carey about large-size industrial developments in this market and why investors are willing to pay more than owner-operators for industrial space in this market.

GlobeSt.com: Are large-size industrial developments becoming a trend in Orange County?

Carey: Projects like Dyer Road and Beckman Business Center don't come around very often. In fact, the Dyer Road project is the largest industrial development in the Airport Area submarket since 1999. The lack of land/opportunities for large-size industrial developments is not improving either, so it would be difficult to categorize these types of developments as a growing trend. However, these projects are good examples of investors finding creative ways to redevelop or renovate older and functionally obsolete buildings to provide the features valued by today's industrial users, an existing trend that will continue.

GlobeSt.com: Is there available land for these developments, and if so, where in OC are they likely to be?

Carey: Land for industrial development in Orange County is extremely rare. The Dyer Road project and Beckman Business Center are both examples of how investors created land for development in Orange County. Both projects are former manufacturing sites that reached the end of their useful life and are now being repurposed to meet current demand.

Going forward, developers will continue looking for land in this form, i.e., older industrial buildings on larger land sites. The scale of the Dyer and Beckman projects is unique, and most opportunities for development will likely be found on two- to five-acre sites, which are more common in Orange County. Since 2011, 86% of industrial development occurred in the North County submarket, but developers should look for these smaller two- to five-acre sites all around Orange County.

GlobeSt.com: What is causing investors to be willing to pay more than owner-operators for industrial space, and what does this trend say about the market?

Carey: While demand for industrial from owner-operators remains very high, and they continue to be the highest-paying buyers for most smaller properties, there are a couple factors that could be leading to investors paying more for some of the larger properties.

Although industrial rents have hit an all-time high, the 1.7% vacancy rate suggests there is room for additional rent growth, and investors remain confident that quality properties will lease quickly. Industrial properties continue to be the most in-demand asset class for many investors, and the lack of opportunities has some investors pursuing properties that historically might have been considered too small from a size or dollar perspective—which puts investors in competition with owner-operators more often. Investors' confidence in additional rent growth and demand from tenants is pushing prices up and cap rates lower.

For the older and/or functionally obsolete properties that require significant work, investors are often better suited to invest the time and capital required to reposition the property, especially when it comes to existing manufacturing facilities with highly specialized improvements. It can be very challenging for an industrial user to take on this sort of project while running their business. So, unless an industrial user is already planning to invest significant time and capital on highly specialized improvements of their own, there are circumstances where experienced developers will be the ones competing hardest for these value-add opportunities—and willing to pay the most.

In the case of more traditional and functional warehouse/distribution facilities, one factor potentially leading to investors paying more in some instances could be the evolving supply-chain landscape. As major trends such as e-commerce and automation continue to take shape, it can be challenging for companies to predict their long-term space needs in any given market. The optimum number of distribution centers and where they should be located is a common question companies are trying to answer, but the inputs driving these decisions continue to change.

In this sort of environment, leasing can provide companies with a greater level of flexibility to meet changing demand and space requirements. Alternatively, many investors are confident that the demand for industrial space will continue and are willing to take a lower initial return to acquire a quality asset that will provide them with long-term value.

GlobeSt.com: What else should our readers take away from your Q3 industrial report for Orange County?

Carey: In Orange County, companies benefit from a large and highly educated labor pool and great access to the ports and greater Southern California market. However, with a 1.7% vacancy rate and very limited supply, companies with expansion needs will need to evaluate other markets in addition to Orange County for aspects of their business that are not taking advantage of these benefits.

Instant Insights /

Is There Room for Large OC Industrial Builds?

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