Why MPG is Betting on Infill Industrial

NEWPORT BEACH, CA—In the long run, Southern California's infill markets will perform well even if interest rates rise, McDonald Property Group's president Bruce McDonald tells GlobeSt.com. As we reported recently, the firm began development on First Park @ Ocean Ranch, a $27.5-million, 237,276-square-foot industrial park in Oceanside, CA. The firm also has two other significant projects underway: Crossroads Logistics Center in Beaumont, CA, being developed in conjunction with its investor USAA Real Estate, and the firm was selected to advise on and represent the disposition of a sizable land portfolio in the Inland Empire that was gifted by the estate of John Boruchin to the Jewish National Fund of New York City. We spoke with McDonald exclusively about his firm's current projects, why they're significant and the land-acquisition strategies he uses in a constrained market.

GlobeSt.com: Tell us about the types of industrial development in which you specialize.

McDonald: My whole career, I've focused on industrial development, and I've built in every size and style: multi-tenant, big box. Our focus now is on 100,000-square-foot to 300,000-square-foot buildings that are divisible into 50,000-square-foot spaces in San Diego, Riverside and San Bernardino counties. But in Beaumont, there are 1-million-square-foot buildings going up as spec. This is the first time in the Inland Empire that more than 1 million square feet is coming out of the ground at the same time. Historically, most were build-to-suit with a tenant already in place. In the Inland Empire, there are seven big-box buildings under development—all spec.

In Beaumont, the advantages to Crossroads are that we're not building spec—we're waiting for a tenant. This was the cheapest land solution, which provides for cheaper rents for tenants. In fact, rents there are between 30% and 40% cheaper than in the prevailing market, and drayage rates are cheaper as well. Many of the large users want to own their own space, so they're attracted to this type of development. There has also been $20 million of infrastructure completed in this market, and there are no further entitlements required, so users have certainty of delivery, which is appealing. We're glad to have partnered with USAA on this project.

GlobeSt.com: What's significant for you about the Jewish National Fund of NYC's portfolio disposition?

McDonald: We have the honor of being retained by JNF—the recipient of the estate of John Boruchin, a Holocaust survivor who settled in Fontana—to dispose of this land, the largest bequeath to JNF in the last 10 years. Land was given to Boruchin, like other survivors, by the government for agricultural use to help him get started. On it, he built some 3,000 homes and became a legend from nothing, a very giving man—he donated land to Fontana for City Hall and the library. He began acquiring land in 1980 in cities throughout the Inland Empire, and that was part of his estate.

We now have this disposition assignment of 25 land parcels—300 acres—and we're are fixing any problems with habitat, access, soil, title and zoning and selling the land. The parcels are in Fontana, Colton, Rialto, San Bernardino, Jurupa Valley, San Jacinto, Mira Loma and Bloomington. Half are zoned for industrial and half for residential, and we have a two-to-three-year disposition timeframe.

I like this particular assignment because not only do I get to work for people I like, but I also get to use my market and knowledge and experience from my decades of work in the Inland Empire.

GlobeSt.com: What land-acquisition strategies are you pursuing in such a constrained market?

McDonald: There is a fear that rising interest rates are going to deflate the value of industrial properties, but quality core assets in infill locations will retain their value better than properties at the market periphery. Institutional capital would prefer to pay a premium for infill locations to preserve future values. There is also more headroom for rental growth in infill markets, so our focus in on infill for the foreseeable future.

GlobeSt.com: What else should readers know about your company?

McDonald: I'm back doing ground-up development. From 1995 to 2010, I developed throughout Southern California. While running a public REIT at DEXUS, I got away from development, so it's great to be back, and I'm excited to be back as an entrepreneur. It's also exciting that we broke ground 30 days ago on the first spec development in San Diego County.