A Chat With Darla Longo

Longo, Howard

ONTARIO, CA-Whenever a large industrial property or portfolio trades, chances are that one of the names associated with the sale is Darla Longo, a vice chairman at CB Richard Ellis. Longo is one of only 41 people at CBRE worldwide to have attained vice chairman status and was one of only 25 who had achieved it when she was named a vice chairman in 2006. She and her CBRE investment sales partner in the Western Region, Barbara Emmons, formed a formal partnership in March with CBRE investment sales teams in the North Central (Mike Caprile and Ted Staszak), South Central (Jack Fraker and Josh McArtor), Northeast (Michael Hines and Michael Blunt) and Southeast (Chris Riley and Frank Fallon) regions to streamline the process for clients and brokers alike. Although the team specializes primarily in industrial sales, it closes its fair share of office sales too, so Longo says, “We major in industrial and minor in office.” Longo in her nearly 32 years with CBRE has played a pivotal role in the development of Southern California’s Inland Empire region (Riverside and San Bernardino counties), which has grown from a land of vineyards and dairy farms into one of the world’s largest concentrations of modern industrial warehouses and distribution space, with 391 million square feet and still growing. The CBRE web site entry under her name lists a who’s who of Corporate America’s industrial owners and occupiers as her clients.

Howard: What was the thinking behind your decision to form a partnership with the other CBRE teams, and what are the benefits for the team as well as the clients?

Longo: We did national business previously, but we partnered on a case-by-case basis. The partnership makes it a seamless process, so the client doesn’t have to worry about who is getting paid and how, and nobody on the team has to worry about how or what they are getting paid. The partnership spells it all out, and it is a 100% fee-sharing arrangement, with 20% to each of the five teams. It doesn’t change how we do business with anyone else at CBRE.

Howard: Who are your clients?

Longo: Our clients are institutional building owners with national portfolios as well as other groups that own real estate. We also have a lot of business with private owners as well. We have very close ties with the local owners and operators as well as the institutional owners. We also have clients who are corporations that need space, like national occupiers and third-party logistics providers.

Howard: Considering the geographic reach of your deals, you could have an office anywhere. Why Ontario?

Longo With Aerial Overview of Inland Empire

Longo: My headquarters is here because Ontario is where I started, and because the Inland Empire is on the leading edge of state-of-the-art industrial buildings in terms of clear height, truck-turning radiuses and any other feature that you can name. What would be considered a B-class building here would be A in some other markets. When I started with CBRE, there was nothing but vineyards here, so I worked out of the Downtown L.A. office at first. I came up through the leasing ranks, and I also am based here because I work with a team here for leasing. We deliver a platform of services to the clients, where, if you have a building and want to lease it, we bring in a landlord leasing team, and we also have tenant reps. And then I come in from the capital markets perspective. We think we offer a different twist because we are packaging capital markets with landlord representation and with tenant representation so that owners and occupiers can have the benefit of the expertise from all of the various specialists.

Howard: How is the industrial market performing and where is it headed?

Longo: I don’t think anyone could look you in the eye and say that they thought we would recover as fast as we have. The Inland Empire alone has absorbed a total of 7.5 million square feet (already surpassing the 2009 annual total of 6.3 million square feet), and we are seeing positive absorption in all Southern California markets as well as across the country.

Howard: Which segments within industrial are growing?

Longo: Corporate America is looking at more efficient facilities and consolidating into newer buildings. The smaller guys, 10,000 to 100,000 square feet, are still really suffering from the credit crunch. The bigger companies are the ones that are absorbing the space.

Howard: Now that investment sales have resumed, was there a specific deal that signaled when the market returned?

Longo: The first significant sale after everything froze was the sale of a Panattoni portfolio to KTR Capital that closed in December of ‘09. The entire country was watching that sale. At that point, the fundamentals were pretty weak, so we tried to project when rents would come back. The portfolio generated 25 offers, ranging from $30 per square foot to what would be the sales price: $52 per square foot, but getting to that $52 per square foot was not easy. We worked very hard to convince investors that this was very high-quality real estate and that we were at a moment in time when the price was well within replacement cost. Ultimately, KTR Capital bought the portfolio for a high-7% cap rate.

Howard: What happened in investment sales after that?

Longo: When that deal traded, it was as if the market began to move in industrial. The Panattoni deal made people think that it was now the time to play, but debt was not back yet. The buyers prepaid the debt to be assumed, so they paid all cash, which was a very smart move.

Howard: What has happened to cap rates since then?

Longo: Industrial cap rates have trended downward to today’s range of 6% to 7.5%, depending on a the specific deal. Capital was sitting on the sidelines for a long time, but it finally realized the deals weren’t going to trade at nine and 10 caps.

Howard: How about financing?

Longo: Debt is back. We closed a deal in Northern California in Richmond and Fremont where people said we would not get the pricing, but we not only got the pricing we brought in accretive debt at 4.5% fixed for seven years. The life companies are lending again. They are picky, and they are asking for cross-collateralization, but you can get leverage for the right deal. 

Howard: How about rents?

Longo: The general consensus is that by 2012 we will have rent growth. But we dropped 25% to 30% across the nation, so the big discussion is about when do we get back to peak rents. I think the consensus is that peak rents will be back within five years, but since we expect continued positive rent growth, investors are looking at where to buy and especially at buying where there are supply constraints.

Howard: How big a factor is distress in the industrial sector?

Longo: Only about 10% of all distress is industrial. And in most cases they are working it out with the borrower. The bad situations are small industrial condo projects that didn’t pencil, or a user who bought a building of 100,000 square feet and put too much leverage on it.

Howard: What has to happen for industrial to reach full recovery?

Longo: We still need job growth overall, even though the industrial market is different from office in terms of how it is related to job growth. We did not overbuild either in industrial or office, so we don’t have a lot of oversupply to burn through.

Howard: What’s in your crystal ball for 2011 and beyond?

Longo: I believe we will have build-to-suits starting within the next 18 months, which is something we haven’t seen for a while. Right now it’s without a doubt a good time to buy at below replacement cost, if you think we are going to have rental appreciation, which the consensus is that we are going to have. The question is, where, when and how fast.