Duke’s SoCal Industrial Portfolio Hits 10M SF

Duke Realty Corp.’s Southern California portfolio has surpassed 10 million square feet. The firm transitioned into a pure-play industrial REIT this cycle, and started buying industrial assets in Southern California in 2011. Since, the market has exploded into the top industrial market in the country with fervent investor demand. We sat down with Chris Burns, SVP of Duke Realty Corp., for an exclusive interview to talk about the firm’s acquisition strategy and how the market has grown in the last few years.

GlobeSt.com: This cycle you have amassed a significant portfolio in Southern California—a highly sought-after market. Tell me about your acquisition strategy.

Chris Burns: We entered the market in 2011 with our first buy, a 323,000-square-foot building in South Bay. Over the course of the next couple of years, we made strategic acquisitions to grow the portfolio. In the fall of 2014, we put the development platform on the ground and we opened our office in Irvine. We have grown from four associates in 2014 to 20 today, and we are still growing. The portfolio has gone up to 10 million square feet, and we have built 54% of that. As a company, we used to be more of a highbred REIT with a healthcare component and some retail as well. Out of the downturn, we decided that we would transition into a pure-play industrial REIT, and that meant divesting from a lot of suburban office, retail assets and healthcare. We have really undergone this transition from a Midwest Southeast-based company with multiple disciplines to pure-play industrial focusing on tier 1 growth, which is the high-barrier to entry markets. Southern California is obviously as important as any to try and expand and grow our portfolio.

GlobeSt.com: Industrial really started to take off in 2013. You were really early in the trend. Did the firm anticipate this growth in advance?

Burns: We are really focused on improving our multiples and improving the overall quality of the portfolio, and making it more attractive to investors. That is why we started to focus on the coastal markets. I don’t know that anyone could have foreseen the demand as strong as it has been in this cycle, otherwise you would have gone after everything, but we obviously really like the industrial product type given that it is low capital, longer-term leases and easier to management. We started acquiring assets from Phoenix, and we looked at numerous opportunities. One of the challenges of growing a portfolio in this market is that the transactions never feel great when you make them. It is a very efficient market, and there is always a lot of competition looking at quality deals. You always have to push a little bit to ensure that you are in line.

GlobeSt.com: How has the market changed since you arrived in 2011?

Burns: In 2011, there was always a high number of opportunities, whether it was buying buildings or looking at land sites. You may not have liked the pricing, but there were opportunities out there. Today, after watching the Inland Empire develop 100 million square feet in the last five years, land is extremely difficult to come buy now and pricing on land has moved 50% to 70% in the last 12 months, depending on what location you are out. You are seeing a lot less opportunities. In addition, construction costs have increased and it is more difficult to get stuff entitled. That is one of the reasons that you are seeing such a premium on investors wanting to be located here.

GlobeSt.com: As the market has changed, have you focused on different industrial product types or development markets?

Burns: The Inland Empire is where the land opportunities have been and where we have been able to get through the entitlement process. We are also focused on looking for smaller more infill deals in South Bay, Mid Counties or North Orange County. In the last five months, we have bought three buildings 70,000 square feet or smaller. It is a combination or assets. We also just wrapped construction on a 200,000 square foot building in the South Bay that we leased to WSS Shoes, and we are completing a 477,000 square foot building in La Mirada that is leased to UPS. So, we are all over the spectrum. I think that we are hunting and looking more in certain geographic locations, and we let the locations dictate the product type.

GlobeSt.com: What have started to see institutional capital partner with private capital sources to penetrate the Southern California market. How have you funded your acquisition, and would you consider joint venture opportunities?

Burns: In Southern California, we are operating 100% fully owned and buying and perusing opportunities for ourselves. They are still hard to get your hands on. Right now as we have finished transitioning out of our previous asset classes, the capital is there so that we don’t necessarily need to go to the outside world and raise additional funds.