Growing Southern California Industrial Demand Creates Shifts in Strategy, Outlook
Industrial real estate in Southern California has become what one might conservatively call a “fast-paced atmosphere.” The presence of multiple offers, sellers pushing up values and buyers continuing to chase deals have made for constantly increasing values and activity. Christopher J. Destino, SIOR, principal at Lee & Associates, spoke to REBusinessOnline about making strategic decisions in this unusual environment.
REBusiness: What is the forecast for demand in industrial properties in Southern California?
Destino: The future of demand in the area is very strong, with developers seeking new sites aggressively and underwriting steady future rent growth over the next couple of years. A lot of that is driven by e-commerce, and there’s still so much room to grow in the e-commerce world. E-commerce accounted for approximately 13.6 percent of retail sales in the first quarter of 2021 (a number that is steadily increasing). There is still a lot of room for that percent to increase, and that’s what is driving most industrial demand.
REBusiness: What are the types of tenants have the most demand for space right now?
Destino: The big three are distribution companies, contractors and service-type industries. There is a still a small manufacturing base, but those are the three that are largely getting the deals.
Distribution companies have all sorts of all product types: high dollar value products to regular homewares, and everything in between. Distribution also includes freight forwarding and third-party logistics companies that store and move around other company’s products. It also includes traditional companies that own, store and deliver their own product directly.
Contractors (plumbers and electricians, for example) tend to be service related and have a fleet of vehicles that need to go out to various job sites. They often occupy industrial spaces. These industries are very busy these days.
REBusiness: What types of buildings are favored amongst industrial spaces?
Destino: When you think of the buildings that would fall under the distribution-type use, they’re going to feature higher ceilings and ample dock loading positions, with quality turning radius for trucks to come and go and distribute product. Those are the number one sought-after deals right now, and they are e-commerce driven. That’s what users want and what developers are building. Other types of industries that are absorbing space (the contractors and service industries) can get away with lower-clear/ground-level loading buildings, but distribution companies are driving the market charge in terms of what is desired for buildings.
REBusiness: What makes Southern California such a healthy market for industrial?
Destino: The proximity to the Port of Long Beach and Port of Los Angeles are the primary drivers. Second is just the sheer population/consumer base that is here. There’s nearly 14 million people in the greater Los Angeles & Orange County area alone. Plus, it’s a huge distribution channel to much of the United States right through these ports.
REBusiness: How has industrial evolved over the past few years?
Destino: Over the last seven or so years, the market has tried to adjust to deal with the e-commerce revolution. That’s why there is nearly 20 million square feet of industrial space that has being built in the Inland Empire every year for the last several years: most of that is getting absorbed by e-commerce-related outfits, in one way or another. That is the evolution: older manufacturing sites, over the last seven to ten years, have either been converted to distribution space (specifically high-cube distribution space) or (in the past) they were converted to multifamily developments.
There is still a manufacturing element for Southern California/Orange County industrial. But it’s mostly higher-end products with higher markups/higher dollar values. These tends to be more specialty products that have low overall volume. Most high-volume manufacturing is going out of the state or out the country entirely.
We’re also starting to see more cold storage, food-distribution-type facilities. Similar to the trends we’ve seen with general merchandise, there’s now an emphasis on establishing direct-to-consumer food delivery channels. Especially in Southern California, people want healthier, locally sourced or organic food. Food needs to be moved from its point of origin to the consumer’s plate faster than ever before. There’s a push for cold storage, but you’re not seeing a lot of spec development for it. I think that demand will persist.
REBusiness: Low vacancy rates can mean multiple offers on available spaces — what is the breakdown for properties getting multiple offers amid so much demand?
Destino: There are a few properties that might have some sort of challenge, and those are not going to get the same volume of activity. But most deals have multiple offers.
When selecting the winning bidder, the use for the property is something to be considered. Even more important is the credit worthiness of any tenant in a lease consideration, as well as the available source of funds for a buyer. Many sales are cash deals, and the tenants that are winning a multiple bid scenario are larger credit tenants, making it difficult for smaller local regional companies to compete.
REBusiness: What’s an unexpected, potential field for industrial in the future, one that you are watching?
Destino: I’ve been expecting to see a big push for some medical device and medicine production coming back to the United States. More could be coming later, as these are costly facilities to set up. It would certainly impact industrial properties, and some of these older manufacturing buildings could, potentially, get rejuvenated.