Earlier this year, Menlo Equities closed on the purchase of the Irvine Crossings project, a 420,000-square-foot industrial warehouse and data center in Irvine, CA from Irvine Crossing LLC. The purchase price was $47 million.

The building was 100% occupied by Savvis, a data center, and 3PL, a third-party logistics company, at the time of sale. According to Trent Walker of Voit Real Estate Services’ Irvine office, who, along with Sam Olmstead, directed the off-market sale, this deal was “a true example” of a value-add property changing hands.

The Voit team was tasked with identifying a buyer who was in the market for a high-quality investment property, explains Walker. In this case, the buyer, which owns office buildings that are adjacent to Irvine Crossings, “recognized the potential for either future expansion of the data center or a re-development down the road. Opportunities like these make a deal a win-win for an investor.”

Although value-add industrial opportunities like this one might be rare in places like Orange County, according to Jim Dieter, EVP and head of US industrial brokerage at Cushman & Wakefield, they’re out there, no matter where a market is in the recovery cycle. The key is to know where each market lands in the cycle and how that affects what type of opportunity exists.

For example, there are opportunities in industrial markets that are leading the recovery. The Inland Empire in California, for example, provides opportunities for investors to secure stable, desirable locations with rent streams that justify the required investments and Central Pennsylvania, where he says its location is among several major population hubs and a good transportation infrastructure is driving up its stock as a desirable location for regional distribution centers. This point is best illustrated, Dieter says, by the recent Liberty Property Trust decision to build a 1.2-million-square-foot speculative development in the region.

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Other markets that have fared well in the recovery include Greater Los Angeles, Silicon Valley, Denver, Houston and Kansas City, MO. “I see all these markets as having solid and stable opportunities for investors,” he adds.

Other markets, like Chicago, New Jersey, Atlanta and Baltimore, have value-add opportunities, but they aren’t as cut and dried as those mentioned above. “Based on the unique market dynamics of each, investors will find opportunities of varying type, risk and potential return,” says Dieter. For example, in several markets, there are acute shortages of big-box space, and in many cases the overall vacancy rate will not accurately depict the true story, he says.

“Chicago, as an example, has an improving vacancy rate that currently stands at 9.8%.” Overall, he says, it has not yet had a significant impact on rental rates, but he is seeing more and more competition for the dwindling amount of big-box options, thus driving increased lease rates in the big-box market.

Finally, in some of the lagging markets, like Las Vegas and Cincinnati, where vacancy rates remain on the high side comparatively, and there has been relatively low demand over the last 12 months, still have value-add opportunities, albeit more risky, according to Dieter. “I remain confident that the economic recovery will maintain its current course, and over the next 12 to 18 months, these trailing markets will start to feel the positive effects and turn the corner.”

According to Steve Kawulok, managing director of Sperry Van Ness/the Group Commercial LLC in Colorado Springs, CO, the energy industry push in some new geographic areas is backfilling industrial properties previously left vacant. These are primarily light industrial space and warehousing/distribution, as opposed to manufacturing, he says. “Areas such as North Dakota, Texas, Pennsylvania and Colorado are having new demand from the energy sector,” he says. “These are new exploration areas which are burgeoning due to technology opening up new fields.”

And wherever you have a new influx of capital from the energy industry, the industrial sector is sure to be in demand, he adds, and value add opportunities should be present. “The influx of capital and demand in this industry is quick and dramatic, especially in areas where it hasn't been before,” Kawulok says. “Several new shale explorations across the country are creating this demand driver.”

For Jason Schirn, principal at Hager Pacific Properties in Los Angeles, the answer for value-add isn’t necessarily where it is, but what it is. “Value-add industrial deals can be found by repositioning older manufacturing properties into functional assets that conform to the requirements of a region’s thriving logistics industry,” he says.

Those “makeovers,” as he calls them, are often challenging because many existing buildings have major limitations. “It takes a creative and committed investor to find other ways to make properties appealing to today’s users, which can require reconfiguring the building to allow functional loading for trucks or updating sprinkler systems so occupants can rack their products higher.”

In Rexford Industrial’s case, the key to value-add is the ability to originate attractive investments that are generally not available to the broader universe of institutional or less-focused investors. Equally important, according to Michael Frankel, managing partner at the firm, is the ability to add value every day during ownership of the asset. Additionally, he says, “adding value means having the appropriate market focus and the ability to execute rapidly and flawlessly with ample cash on hand, and, above all else, prioritizing your customers—which are your tenants—at every turn.”

Henry Hanna, national director of industrial properties at Sperry Van Ness, agrees, noting that it’s important to be creative and look to rebrand older industrial spaces where others might have only seen problems. “That is the key in creating new value,” he says. He points to an example in Easton, MD, where a developer bought a closed printing facility for $15 per square foot and is redeveloping it for professional office space. “The plant was dark for several years until its in-town location, very close to the hospital, was envisioned as better for medical use than industrial.”

Scott Skogmo, a senior advisor at Sperry Van Ness in Columbia, MD, says he has seen about a 10-year reset in rental rates for class B industrial. “It appears to me that we are at a low point in the cycle, therefore the value-add would be to acquire a leased industrial building now, if you believe that rents will eventually increase again, which they surely should, since there is very little new construction,” he says. “The market will get tighter, eventually.”

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