SoCal Industrial Has “Best Fundamentals”

LOS ANGELES—The Southern California industrial markets have the best fundamentals in the country, according to Howard Schwimmer and Michael Frankel, the co-CEOs of Rexford Industrial. The public industrial REIT is extremely active in the Southern California markets with a strategy that favors assets in infill locations, whether they are value-add or stabilized. After hearing so much about the company's never-ending stream of deals, we sat down with Schwimmer and Frankel to find out about the competitive strategy behind these transactions and get their take on the industrial market. Here is a look inside Rexford Industrial:

GlobeSt.com: Tell me a little bit about your business strategy and your decision to focus on infill industrial product in the Southern California market?

Howard Schwimmer and Michael Frankel: Our strategy is to buy industrial buildings in the infill markets in Southern California, which stretch from San Diego to the Inland Empire to Ventura County, and we haven't stopped following that plan. Those infill markets are 1.6 billion square feet of the total market. We tend to buy buildings that are anywhere from $5 million to portfolios that are up to $200 million, but if you look at our average transaction size, it is around $15 million. We buy a combination of core real estate, usually those are buildings that are leased and have income in place, and value-add real estate, which can range from demising vacant buildings to obsolescence on a smaller scale. The infill markets in Southern California have the best fundamentals in the nation, and that is through good times or bad times. They tend to perform better for a variety of reasons: you have got the largest population concentration in the country, and it continues to grow; we have a shortage of real estate, and therefore we have a very high occupancy rate; and you can't introduce any new product, so our ability to maintain occupancy is very favorable. All of that leads to the ability to drive very creative returns and growing returns as we progress through the latest cycle.

GlobeSt.com: Are there markets within Southern California to which you are particularly attracted?

Frankel and Schwimmer: Well, 70% of our portfolio is located in L.A. and Orange County, but we are looking for opportunities in all of the markets that I mentioned. We do have a higher concentration in the San Fernando Valley, where we have close to 3 million square feet of our portfolio. That market has been a good performing market for us.

GlobeSt.com: As you mentioned, this is a very competitive industrial market and you are focusing on high barrier to entry areas. How are you finding and winning deals?

Frankel and Schwimmer: Today, a lot of the deals that we do have a value-add component to them, and a lot of times we see things that a lot of other buyers don't. We have three licensed contractors on our staff, so we are always looking at how to create value, and in doing so we are often able to secure the deal ahead of other buyers because we are able to create stronger cash flows.

GlobeSt.com: Is there less competition for industrial value-add properties, then?

Frankel and Schwimmer: No, there is competition. We buy most of our properties in off-market transactions. So, perhaps it is because we are not focused on the widely marketed aspects as much. Obviously, there is going to be less competition if the property is not widely marketed. We have invested over the past 14 years, and a lot the secret sauce in terms of what we do to create those opportunities is relationships, and those are not something that you can build overnight. I have been in the market for 32 years, and we have a lot of other people on our staff that are deeply rooted in Southern California industrial as well.

GlobeSt.com: How do you reposition a building to drive cash flows and value?

Frankel and Schwimmer: We make a lot of physical changes to these buildings, and typically when we buy something, it is not the most functional product. In the particular submarkets, we are proactively renovating the buildings so that they are the best-quality product in that market. Last year, we bought a single-tenant property in the Van Nuys area in 4Q14. Our plan was to demise it into a two-tenant building. In doing so we were able to achieve a much higher rent than we would have been able to accomplish if it was a single-tenant building, and the cost to demise it was not very significant. We bought another building in the San Fernando Valley area that was 58,000 square feet that had good bones and 24-foot clear heights, but no dock-high loading and an excessive amount of mezzanine. We tore back a big portion of the mezzanine, added new dock high loading and a new sprinkler system. When we're done with it, it will be a like-new building with best in class features for that market. We took something that was literally a white elephant and turned it into a high-demand modern facility.

GlobeSt.com: How long does it typically take to lease up a building?

Frankel and Schwimmer: The building that we just mentioned in Van Nuys, we leased 90 days after we purchased the building, which was 11 months ahead of our pro-forma. We had assumed that we needed to do the physical construction work to demise it before we even marketed the space. The demand is so strong in these markets that it leased quickly, and we see that for most of the product that we deliver to market. Demand is very strong.

GlobeSt.com: Where do you see the Southern California market over the rest of the year?

Frankel and Schwimmer: I think it is going to continue to be strong from a fundamental standpoint, with high occupancy and growing rental rates and property values. It is a huge market and it is very fragmented in terms of ownership, so there is always a lot of opportunity in terms of buying assets, whether they are core deals or value-add. We are excited about the market, and we think there is still a lot of opportunity on the rental side in terms of the product that we focus on, and our ability to grow rents in the product that we are buying.