Why Industrial Developers Are Going Small

Industrial developers in Southern California have focused largely on big-box industrial builds, especially in the Inland Empire. While users of warehouse and distribution center facilities have fueled the industrial activity, demand for last-mile distribution centers has grown, but it has largely been overlooked by developers. Thanks to major growth in the Inland Empire West MSA—which is among the fastest growing metros in the country—there is an even greater demand for small-box industrial that can service the local community. Orange County-based CapRock Partners is fulfilling the demand. The firm is under construction on 1 million square feet of last-mile distribution space, including the Serrano Business Park, a 327,000-square-foot three-building project with units ranging in size from 31,220 to 179,030 square feet. We sat down with Jonathan Pharris, co-founder and president of CapRock Partners, to talk about the firm’s strategy for small-box industrial, its latest project and how the Inland Empire West market is changing.

GlobeSt.com: You have just broken ground on the Serrano Business Park, which is part of a collection of small-box industrial product that you are building in Southern California. Tell me about this development strategy.

Jonathan Pharris: We are under construction on a little less than 1 million square feet of last-mile logistics buildings throughout the Inland Empire West, and we have created a strategy tailored towards last-mile logistics throughout Southern California, and the Serrano Business Park fits in perfectly with that last-mile logistics strategy. Within that strategy, we are really targeting smaller buildings that are targeted toward entrepreneurs and ecommerce-related activity. The largest building within that 1 million square feet is at the Serrano Business Park, and it is 178,000 square feet. Our strategy is really to build 200,000 square feet and smaller.

GlobeSt.com: What was the impetus to build more small-box industrial product?

Pharris: Most developers have focused on big box industrial buildings, which is something that we have done as well, but the demand for last-mile logistics buildings of properties that are less than 200,000 square feet has really gone unmet. Vacancy rates for smaller buildings in the Inland Empire West is approaching all-time lows. For projects that are under 200,000 square feet, we have experienced double-digit rental increases for the last three years. The rental change is very dramatic.

GlobeSt.com: Are you seeing increase demand for smaller industrial facilities?

Pharris: Absolutely. There is very strong demand throughout Southern California for smaller buildings that are catered towards small companies. Last-mile logistics, depending on the location, could have anything from a Fortune 100 user as well as a smaller entrepreneur. In general, the Inland Empire has a lot of demand factors, whether entrepreneurs, import-export related to the ports or serving the local population base. We are really striving to meet the goals of both those strategies. We will be under construction on 4 million square feet right now, including the 1 million square feet that we are building now. The additional 3 million square feet is what you would think of as more traditional Inland Empire uses, which is bog boxes.

GlobeSt.com: What is driving demand for smaller facilities in the Inland Empire market, which has been known for mega big-box industrial development?

Pharris: The Inland Empire MSA is one of the fastest growing MSAs in the entire country. The population growth that it has experienced is among the leading in the entire country. That has really created a need for the market to be able to service its own population. 20 years ago, the Inland Empire’s industrial buildings were service providers for L.A. and Orange County. Today, with the population growth, these buildings also service the entire community.

GlobeSt.com: You have only just broken ground on the Serrano Business Park, but have you seen any interest yet as a result of the strong demand?

Pharris: We have the flexibility to lease or sell the buildings at Serrano, and we have had interest in both. We have had very significant discussions with buyers interested in buying all three of the buildings as well as a build-to-suit for one of the buildings. We were in discussions with both tenants and buyers before we even broke ground. The activity has passed our expectations at this point, and that goes to prove that the market and the demand are both strong.

GlobeSt.com: In general, what is your outlook for small-box development activity?

Pharris: Development is very cyclical. Right now in the broader economy, it is a great time to be building. Vacancy continues to go down, net absorption continues to increase and rental rates continue to increase. Across the board fundamentals are appropriate for development, but with that being said, we are very cautious of rising land prices and rising interest rates. Today, we are very bullish on industrial development, but we are aware that there are things on the horizon that we need to be looking at because it could change.