Land Values Will Continue to Rise

ONTARIO, CA—As the drive for development in the Inland Empire ramps up, land prices are heading north and developers are becoming more sophisticated with the capital stack, said speakers at RealShare Inland Empire last week. What's more, there's so much capital looking for deals that developers can afford to re-jigger the capital stack, they said during the “Development Update” panel.

Moderator Brandon Sudweeks, president of Coldwell Banker Commercial Sudweeks Group, asked the panelists what areas exist for new development opportunities in the Inland Empire. Tom Bak, senior managing director of Trammell Crow Co., said, “All the easy stuff is gone, but this is a good market for what we do. You can keep your land-cost basis low by using an assemblage approach. Also, a brownfield approach is good, but there are environmental issues to deal with. We're more focused on extending loans past 2020; we have more of a hedge strategy where loans and rights are extended into the 2020s.”

Rob Guthrie, CEO and founder of Guthrie Development Co., said for his firm the Inland Empire is “infill, infill, infill.” His firm does small condo conversions from leftover sites for industrial users, selling mostly to Asian-owned businesses that are in the importing side of things. “We're also looking at the proximity to executive high-end housing like Rancho Cucamonga.”

Don Gause, principal with Wermers Properties, said his firm builds multifamily properties near freeway entrances to job centers such as Corona, Temecula and Riverside. “We're building 861 units on Main St. just north of the 91.”

Bak said land pricing is driving where we're going. He added that land in Orange County runs $30 to $35 per square foot, while in Corona, it's $20 to $25 per square foot. “You need to go farther out for cheaper land. Without e-commerce, we wouldn't be driven. You have to have a reason to be here vs. the infill markets.”

Steven Orchard, SVP, structured finance, for Transwestern, said “Capital is more confident in the market, but it still wants to travel with the herd.” This means primary gateway markets and bondable capital. “Demand will keep industrial-property cap rates low.” He added that 80% of new construction is spec, but absorption will be fine because of the demand. “We will see more capital flowing into more niche plays,” he predicted.
Gause said the  San Diego multifamily market is hot and will continue to be through 2019, and Bak said there's a lot of change going on in the development realm. “Developers are more sophisticated. There's so much capital that the developer can re-jigger the capital stack.”

Sudweeks asked the panelists if construction-loan financing will return, and Orchard said he is seeing it come back. “The problem is finding developers willing to put their balance sheet on the line.”

Guthrie pointed out that structured-finance groups can offer slightly better leverage than banks. “We are moving away from banks to non-traditional lenders.”

Bak said the “juice here is in the housing market, which will come back faster than people think. Watch the housing market here—it's soon to recover.”

Gause added that the Corona marketplace is getting Orange County's multifamily runoff from tenants who are priced out of that coastal market. “We have no interest beyond the portals to gateway markets near job centers.”

Guthrie commented that there has not been enough new development, and yet demand is back. “People want to own, but there's nothing to own. We show them their monthly mortgage payment on newer product is equal to rent. As we see development increase, we will exit condo conversion and go into small-product development.”