Where Does Industrial Stand Now?

LOS ANGELES—With vacancies approaching 0% in some markets, the industrial sector is hotter than ever. Space is at a premium, and after the big-box renaissance, smaller users are now seeking hard-to-come-by space, said speakers at RealShare National Investment & Finance's panel “Big Money for Big Boxes: Why Industrial Remains an Attractive Asset Class.”

Moderator Wayne D'Amico, CCIM, president and principal of Wayne D'Amico & Co. Inc., said of the 12.1 billion square feet of industrial product in the US market, 75% of it is warehouse and distribution, while 20% is manufacturing space. He asked the panelists, “Is it all about warehouse and distribution?”

Jitesh Raja, president of MBS Dynamic, said, “Seventy-five percent of everything we own has been on a ship. Warehouse and distribution is big because of heavy imports. Most people are consuming imported goods.”

D'Amico pointed out that 40% of the total US industrial inventory is concentrated in seven markets across the country, and 70% of the activity is also in those markets. Jonathan Pharris, co-founder and director of acquisitions for CapRock Partners, said from the Inland Empire side, user demand is driven in smaller buildings of 100,000 square feet or less. Many of these are Asian owned with a nice image and state-of-the-art features. Other heavy users in this market are third-party logistics firms, and many companies are consolidating from smaller spaces and moving to 36-ft. clear heights. Much of this is still warehouse and distribution space, and there is currently 20 million square feet of it under construction in the Inland Empire. “Every one of our buildings is being designed to 36-ft. clear heights and the latest specs.”

Tim Gudim, managing principal for Brennan Investment Group, said manufacturers “want to be proximate to a higher-skilled labor force.”

John McManus, CCIM, EVP of Cushman & Wakefield, said because of online shopping, many older properties don't meet the criteria for current warehouse, distribution and fulfillment needs. “It used to be handled on a pallet basis, but now you can order a six-pack of water to be delivered to your house. It's a completely different way of handling product. You can't take a regular warehouse and use it for this type of fulfillment.”

Pharris said new projects tend to be for Fortune 1000 companies, but “every single vacancy factor in Southern California is less than 6%, which means people are making it work in Southern California no matter what the product is because they have to be close to home or service a certain market.” He said class-A vacancy is near 0% in some markets, which means only one vacant building in some cases.

Raja, said 50% of the new product being built in the Inland Empire is build-to-suit. “By the time you put the roof on, you will get calls. Owner/users are afraid they may be priced out, so they're having build-to-suits done. There's a fear of rental or price increase.”

Gudim said, “Users, just like investors, are trying to lock in low interest rates.” He added that some of these markets are controlled by regional guys that have a hold on the market. A term he said is becoming more common is “spec to suit,” whereby a project starts out as spec, but then becomes a build-to-suit as a tenant is in place before it's completed.

Looking ahead, Gudim said there's room to run for another 18 months to two years in industrial. “It will take at least a 50-basis-point increase in interest rates for the spread a developer is looking for on exit.” He also cautioned about the “condos for sale” signs coming out, which is an indication that “the fat lady is getting ready to sing.”

Pharris said he's bullish on Southern California. “There are more high-quality users in the market today than last year—it's growing each year.” He added that he is less bullish on the 215 corridor—Perris and Moreno Valley—and he predicted some rental-rate growth moving forward but not as great as we've seen. “It's difficult to find well-located sites in West Inland Empire that are less than $20 per square foot.

Raja said the first new product to come online after a recession is always the big boxes of 500,000 square feet to 2 million square feet. “The spec and small users pop up later because the smaller companies see the recovery on the horizon and feel safe.”

McManus said firms with product in other high-profile markets like Chicago want state-of-the-art distribution centers in Southern California that match the DCs in the other markets. “They will pay more for them, but tenants in older product won't pay the higher rents, and it will start to slow down.”

The topic of online shopping came up, and D'Amico asked the panelists if the industry is vulnerable to the next big thing after Amazon.com. Gudim said, “Online shopping is here to stay; 55% of total industrial absorption nationally is for e-commerce, and it's growing. The segment that's underserved is the multi-tenant, 25,000-square-foot-to-100,000-square-foot market because it's expensive to build these buildings.”

Regarding entitlement, Raja said, “So many issues could come up once you're in, so we look for entitled land. The risk is too big to entitle it yourself.”