Shooting for a Million—Square Feet, That is

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SAN DIEGO-Demand for investment-grade industrial product in San Diego is at a high, and it doesn't look like it's going to slow down anytime soon. For a short while, investors in the region benefitted from what some might call “perfect timing”—that moment when the stars align and pricing is low, debt is cheap, and there is quality product available. Today, two of those three factors remain.  Pricing and debt still make this a great time to acquire quality industrial product, though in San Diego, the caveat is finding it. 

With that in mind, many investors are in an all-out hunt to find the right properties and make investments now.  For example, at SR Commercial, we acquired eight industrial properties in 2012, and we plan to double that in 2013.  Our goal is to own over a million square feet of quality industrial product by the end of the year.

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We know that competition will steadily increase, which is further impetus to get out there and make deals now. There is more competition in today's market than there was 12 months ago, and we will see more players jump in over the next 18 months.

In addition, more tenants are entering the market, and with no new development underway, the market will tighten, driving lease rates and values up.  Already, core industrial inventory is drawing upwards of 20 to 30 offers in the San Diego market, and these bidding wars will continue to push values. This is great news for investors who already own quality properties in the market, and is further motivation to make deals now which may deliver a double digit cash on cash return moving forward.

As these factors continue to impact the San Diego industrial market, the question remains:  how does today's investor identify opportunities in San Diego amidst the declining supply of quality product?  For our team, it's about the basics:

1.  Buy Functional. 

Right now is a good time to buy, provided the asset is functional for the market in which it is located.  In order to recognize this, it's essential to know the market well. 

For example, our team was recently considering the acquisition of Flex building in Miramar, Calif.  The building, however, was situated within a distribution submarket, where tenants would typically seek warehouse space.  The building would have been an excellent investment if it were located in a different submarket, but due to the lack of functionality for the market, we chose not to acquire the property.

2.  Be Good To Brokers. 

Brokers are key to an investor's success.  Since these professionals can help investors to identify off-market deals and get them completed quickly, strong broker relationships mean more opportunities. 

At SR Commercial, we maintain strong relationships and always retain the brokers with whom we work to act as leasing agents once an acquisition is complete.  In addition, we are open to brokers investing in deals with us, which provides further opportunity for them to benefit from the transactions we complete together.

3. Close. 

There is no question that the main concern of most owners and brokers is whether a deal will close.  For this reason, owners will always seek qualified buyers with a strong track record of completing deals. 

The reputation of an investor who fails to close once a property is in escrow can be a major hindrance in maintaining a solid reputation and seeing more opportunities from brokers for future deals.  With this in mind, as obvious as it sounds, investors should avoid going into escrow on properties on which they know they will need to re-trade pricing and terms in order to make the deal work.  Thorough due diligence and market knowledge is essential at the beginning stages of analyzing a deal.  

CJ Stos and Adam Robinson are co-founders and principals of SR Commercial. The views expressed in this column are the author's own.