Industrial Success Won't Be Effortless in 2016

LOS ANGELES—There is still runway left in this cycle—for those willing to work for it, according to Don Ankeny, the president and CEO of Westcore Properties. Ankeny is speaking on the Investment Leaders: The Big 5 & Beyond panel at the upcoming RealShare Industrial West conference on January 19 and 20. There are still plenty of industrial opportunities in the market, but Ankeny stresses that success won't come as easily as it had in the past. Before Ankeny steps up to the panel stage, we sat down with him for some pre-conference insight on the market and his concerns and forecast for 2016. Here is what he tells us:

GlobeSt.com: What is your outlook for the year ahead?

Don Ankeny: I think there is still room to run. You have to be selective and disciplined in what you're buying. We are looking at some markets that might be considered a little less gateway or core. I don't think the class-A cap rates are going up; I think there is a better chance of the class-B spreads coming down, so we see some opportunity there. We think it is going to be an environment where it is more important to really work the business plan for whatever it is that you are going to do—develop, renovate, lease-up—because the market is not going to deliver success the way it has over the last couple of years. You are going to have to earn it.

GlobeSt.com: Which markets outside of the standard "core" markets are you looking at?

Ankeny: We just bought our first asset in Phoenix in years, and we are under contract on a property in Seattle, which is a hot market. We have bought some infill L.A. stuff that is definitely B product. In markets where the vacancies are below 2%, we think there is an opportunity to push rents and get excellent returns.

GlobeSt.com: It sounds like we can expect another healthy year for industrial. What are your biggest concerns for 2016?

Ankeny: Land prices are going up. We are seeing examples in Southern California where people are taking existing product and tearing it down so they have a land basis of $40 per square foot for industrial. With a 50% coverage, which is being generous, you are going to have $80-$85 per square foot into the dirt alone. That is getting up in the nosebleed territory. I do have concern there, because maybe people can justify a going in price per square foot that high, but it begs the question, how are they going to exit that deal? Does that imply that an asset at $180 per square foot today is going to trade at $240 per square foot in five years, when you can buy office product at $140 per square foot. You are in uncharted territory, and I think that suggests that we want to be cautious and understand the fundamentals of the strategy. We're looking for product that is synergistic to what we already own.

GlobeSt.com: How do you remain cautious and keep a competitive edge?

Ankeny: Honestly, if the only way we are going to get something is by paying more than someone else, that is typically not our deal. We have been successful by working on off-market transactions. Everyone likes to talk about off-market transactions. Brokers touch these deals all of the time, but a lot of times, these are deals that don't have an easy solution and the sale sort of languishes. We circle back then to see if we can make it work. We had a good case study in Northern California. We bought four different buildings that were not homogenous at all: one was a class-B vacant industrial building, one was a class-A industrial building, one was an over-market leased office building and one was a manufacturing building. The sale didn't work for a core player or a value-add player and the office building scared off the industrial guys. We ended up tearing down the office building and the manufacturing building and built a 300,000-square-foot warehouse and leased that up to Tesla; we renewed the lease on the class-A building and we did a user sale on the class-B vacant building. We didn't just double our equity; we doubled our purchase price. I think the reason that we got into it was because it didn't fit anyone else's box neatly.