Why Isn’t There More Industrial Redevelopment?

Industrial redevelopment is more expensive than new construction, but it is essential to bringing more quality class-A product to the market. This is especially true in Los Angeles and submarkets like the San Gabriel Valley, where there is a large stock of class-B or class-C industrial product and growing demand for higher-end space. In general, almost all of the new supply in the last decade to come to the L.A. market has been new construction.

“Redevelopment will be vital to bringing class-A facilities to the San Gabriel Valley where the bulk of the inventory is currently class-B space,” Eric Chou, VP at JLL, tells GlobeSt.com. “The cost of redevelopment is generally much more expensive than new construction as there are costs associated with building demolition, potential zoning changes, environmental cleanup and permitting and entitlement, just to name a few.”

Mid-sized buildings averaging 50,000 square feet are in the highest demand. Recently, developers have been building larger footprints for ecommerce and logistics users. “From the mom-and-pop perspective, smaller-box industrial facilities will always be popular in the San Gabriel Valley,” explains Chou. “The mom-and-pop import/export businesses, which make up the bulk of the occupiers in the San Gabriel Valley are not going away anytime soon or actually ever. For these small occupiers, it is not worth it to migrate eastward despite the lower building operating expenses and the lower numbers on a lease/purchase. Most of these small occupiers choose the San Gabriel Valley because it is close to their personal residences, around the retail amenities that they prefer, and a short commute for most of their employees.”

Because there is a large stock of mid-sized existing properties, this could present more redevelopment opportunities. “The best candidates for redevelopment are Class B buildings with low coverage and excess land; class-C buildings, which are almost all functionally, obsolete and free of environmental issues; and contractors, piping and lumber yards,” says Chou.

Demand is continuing to grow for smaller facilities. “From a corporate tenant perspective, as consumer’s demand for shipping speeds continue to grow, the San Gabriel Valley has been one of the most sought out area for final mile facilities as the drayage costs are lower and, more importantly, the market is much closer to a dense population,” says Chou. “We are seeing that several large Fortune 500 firms are choosing to place their 1 million square foot plus distribution facilities to the Inland Empire East and place smaller 50,000 to 200,000 square foot final mile facilities in the San Gabriel Valley and Greater Los Angeles Basin. The smaller final mile facilities generally have less strict requirements on clearance heights, 24-plus feet, than the distribution facilities, 36 plus-feet, as the building is not meant for long term storage and should be operating with extremely high inventory turnover.”