How Dated Industrial Can Become a Class-A Facility

There is a well-known industrial supply-demand imbalance in Southern California, but for class-A product, the supply is extremely scarce. With limited land for new, class-A development and a low single-digit vacancy rate, there is a substantial stock of dated industrial product throughout Southern California, but updating these properties into class-A facilities that meet the unique needs of today’s users is a difficult task. Industrial developer CapRock Partners recently converted a dated industrial asset in San Diego into a class-A facility. The 85,824-square-foot industrial facility is located on 5.2 acres 15 miles from Downtown San Diego and was functionally obsolete. In a market with a tight supply for quality industrial product, these characteristics made it ideal for redevelopment.

“10054 Old Grove Road had never been available on the market before,” Patrick Daniels, co-founder and CEO, CapRock Partners, tells GlobeSt.com. “The previous owner occupied it for over thirty years and the space was built out for its specific use. Bob O’Neill, senior vice president of acquisitions at CapRock Partners, led the acquisition of the asset and set a vision for the property that our team was able to carry out. While the property needed significant renovations, the building had unique features for San Diego industrial buildings such as a business park setting, 30-foot warehouse clearance and a glass curtain wall in the warehouse. The finished product provides a turnkey solution for a wide array of potential occupiers.”

It is hard to say when a property is a good candidate for redevelopment, especially in a tight market where a tenant is willing to pay high rents for a dated property. As a result, CapRock takes a singular approach to finding opportunities. “There is no one-size-fits-all formula to repositioning industrial assets,” says Daniels. “Our team takes a strategic entrepreneurial approach and carefully considers many factors in determining the business plan for each property. For example, 10054 Old Grove Road is located near I-15, an essential transportation route in Southern California. We considered the property’s location and functionality to design a flexible floorplan that appeals to a variety of users as a potential corporate headquarters, manufacturing and/or distribution facility.”

While rents and demand are both at record levels, these factors don’t immediately make redevelopment more compelling or profitable. “To bring a building like 10054 Old Grove to a marketable state, a considerable amount of improvements needed to be completed,” adds Daniels. “In a supply constrained market like San Diego, the prospective tenant could be from a wide range of industries and will be looking for a tenant improvement allowance higher than many other submarkets. Our team is conscious of that and we want to provide the flexibility for a tenant to create the best use of the space for its business to succeed while maintaining an attractive return on investment for CapRock and our investors.”

Cost is among the greatest challenges in redeveloping an industrial property, particularly in transforming former construction to meet the needs of today’s users, particularly those in ecommerce and logistics industries. In addition, redeveloped properties have to conform to modern development regulations. “Such items include Americans with Disabilities Act accessibility and compliance through the interior space, storm water pollution prevention changes to the exterior and grounds, and updates related to California Title 24, which ensures new and existing buildings achieve energy efficiency and preserve environmental quality,” says Daniels. “These are all critical components that need to be addressed, but do not add to the aesthetic repositioning of the project.”

Even with challenges, CapRock is bullish on industrial redevelopment in Southern California. “Value-add investing is a core focus of CapRock Partners’ acquisition criteria,” says Daniels. “Although the supply of value-add opportunities has become very constrained in the Western U.S., our team is proving to be one of the most creative repositioning groups in evaluating opportunities and implementing solutions to solve functional challenges in buildings.”