Wigwam and Jones was a 12-bulding project that was conceived as a building-for-sale project with 6,000-square-foot to 10,000-square-foot units. It was really a victim of bad market timing. We acquired 11 of the 12 buildings, and one sold prior to us taking ownership of the asset. Several buildings were leased, so we retained most of those tenants and as those leases rolled, they were cleaned up and sold off to owner/users. We've sold eight of the buildings so far—seven to owner/users—signed a lease with handbag manufacturer Kate Spade and sold that building to an investor. We still own three of those buildings: two are vacant, and we're marketing them for sale.

Another building we sold was on Sunset just west of I-15, a two-building project we bought on Auction.com in April of 2015. The plan wasn't necessarily to sell those buildings, but one of the tenants defaulted on its lease, so we had to go in and clean it up and then put it on the market for sale and for lease. It was sold to Moda Light a few weeks ago; we have retained the adjacent building.

GlobeSt.com: What is your investment strategy moving forward?

Mattox: We're in the Western US, and we own assets in Southern California, Las Vegas, Phoenix, San Joaquin Valley, CA, and central Texas. Most have a value-add component and some sort of functional obsolescence or vacancy at acquisition, something where there's a problem or opportunity that can be either fixed or exploited. Some of the assets that we bought, and to the extent that we were able to exploit that opportunity, we have decided to sell. It's a pretty good time to be a seller, with cap rates low, vacancy rates low and a favorable interest-rate environment.

There are a handful of projects we've chosen to put long-term financing on and keep. It's a project to project decision, who the investors are, and we've made that decision once we've stabilized the rent roll.

We're still looking for assets that have those characteristics, where we can come in and do something to the project or the rent roll to increase value, but they are getting harder to find. Overall, yields are being compressed, and it's hard to find attractive value-added returns similar to those we were finding one or two years ago. We will be more cautious in 2017 than we were in the past, but we're still looking at those opportunities.

GlobeSt.com: Where do you see the most growth potential as we close out 2016 and move into the new year?

Mattox: We're pretty narrowly focused on industrial projects, small and mid-bay. We're under contract to do a 140,000-square-foot multi-tenant industrial development project, but there's still room in select cases. Ground-up development entitlement is unbelievably difficult, especially in California, so it's better to buy an entitled site or one where the seller allows the developer the necessary time for entitlement. Vacancy in US. industrial is lower than ever, and it's a supply-constrained environment. Most markets we're in are in the low single digits with vacancy.

As we move into the new year, we will have a continued focus on industrial acquisitions versus construction. It's extremely expensive to build small and mid-bay multi-tenant industrial, and rents don't justify the development cost in most cases. Projects similar to Walnut, for example, that we purchased in the high $50s per square foot, would cost in the low $90s per square foot to build today, exclusive of land. In most cases, the rents that will be achieved at the property simply won't justify the construction costs.

GlobeSt.com: What else should our readers know about the multi-tenant industrial sector?

Mattox: It will be interesting to see with the election how capital gains get treated. External issues like that can have an impact—whether the carried-interest component will impact developers' and operators' disposition strategies. Interest rates will impact our business one way or another, and there are multiple opinions on that front. The owner/user is one area where we see strength, but it's been slow and steady compared to past recoveries. We're starting to see that dynamic manifest itself more quickly than it has in the past several years. A lot of owner/users are taking advantage of low-interest loans to buy their facilities to lock in occupancy costs at historically low interest rates and still relatively affordable valuations. That market we believe will be strong through next year. The investment market will be a matter of whether rents continue to grow and at what pace. Value-add returns today require reasonable increases in rents in order to create yield because going in cap rates are so low.

The industrial sector has become the hottest segment in commercial real estate. How will logistics companies keep up with the market forces of omnichannel commerce? When will new supply finally catch up with demand? Who's putting investment capital into industrial and what does the future hold? Join us at RealShare Industrial on November 16 and 17 for answers to these and other questions. Learn more.

IRVINE, CA—Value-add opportunities are ideal for multi-tenant industrial properties, which are extremely expensive to build and difficult to entitle ground-up, MCA Realty principal Tyler Mattox tells GlobeSt.com. As we recently reported, the firm acquired Walnut Business Park, a 92,056-square-foot value-add multi-tenant industrial business park in the northern submarket of Las Vegas, for $5.1 million—at a significant discount to its replacement cost—and plans to strategically reposition the asset to create long-term value, according to Mattox. MCA also recently sold approximately $8 million in industrial units in the same area. We spoke exclusively with Mattox about the recent Las Vegas deals, its investment strategy moving forward and where he sees the most growth potential as we close out 2016 and move into the new year.

GlobeSt.com: Your company recently acquired Walnut Business Park and sold several industrial units in Las Vegas, can you tell us a little bit about each of these deals?

Mattox: With Walnut Business Park, we bought a project at Wigwam and Jones two years ago from Colony Capital and the FDIC, which had formed a joint venture to acquire non-performing loans. This was from the same portfolio. They contemplated subdividing it and selling off pieces of it individually, but didn't. When it came around again, we had the background on it and ended up buying it from a receiver, not off-market, but the lender knew us from a previous transaction. We own several other business parks in the area. This property, in particular, was of relatively recent construction, yet presented a strong opportunity for upside potential. It's generally better for us if the assets we acquire have a problem to work through, which in turn allows us the opportunity to create value as opposed to stabilized assets where value creation is more contingent on market rent growth.

Generally speaking, we're trying to buy assets with a value-add component, and there's generally not the same yield potential with straightforward properties as there are in properties with problems. In this case, the property had a pretty interesting color scheme: there was a dated color scheme, and some meaningful deferred maintenance. We opened escrow when it was 75% occupied, and there were some tenants in serious default—some hadn't paid rent in six months. We were fortunate to secure a new tenant that took staged occupancy of four of the units during escrow which helped us stabilize the rent roll and allowed us to evict some of the non-performing tenants. Today, it's about 90% leased. We repainted, changed signage and removed some obstructive landscaping. This was a relatively new asset, so nothing super-comprehensive was needed—primarily aesthetic upgrades. We also had to clean up some automotive blight.

Wigwam and Jones was a 12-bulding project that was conceived as a building-for-sale project with 6,000-square-foot to 10,000-square-foot units. It was really a victim of bad market timing. We acquired 11 of the 12 buildings, and one sold prior to us taking ownership of the asset. Several buildings were leased, so we retained most of those tenants and as those leases rolled, they were cleaned up and sold off to owner/users. We've sold eight of the buildings so far—seven to owner/users—signed a lease with handbag manufacturer Kate Spade and sold that building to an investor. We still own three of those buildings: two are vacant, and we're marketing them for sale.

Another building we sold was on Sunset just west of I-15, a two-building project we bought on Auction.com in April of 2015. The plan wasn't necessarily to sell those buildings, but one of the tenants defaulted on its lease, so we had to go in and clean it up and then put it on the market for sale and for lease. It was sold to Moda Light a few weeks ago; we have retained the adjacent building.

GlobeSt.com: What is your investment strategy moving forward?

Mattox: We're in the Western US, and we own assets in Southern California, Las Vegas, Phoenix, San Joaquin Valley, CA, and central Texas. Most have a value-add component and some sort of functional obsolescence or vacancy at acquisition, something where there's a problem or opportunity that can be either fixed or exploited. Some of the assets that we bought, and to the extent that we were able to exploit that opportunity, we have decided to sell. It's a pretty good time to be a seller, with cap rates low, vacancy rates low and a favorable interest-rate environment.

There are a handful of projects we've chosen to put long-term financing on and keep. It's a project to project decision, who the investors are, and we've made that decision once we've stabilized the rent roll.

We're still looking for assets that have those characteristics, where we can come in and do something to the project or the rent roll to increase value, but they are getting harder to find. Overall, yields are being compressed, and it's hard to find attractive value-added returns similar to those we were finding one or two years ago. We will be more cautious in 2017 than we were in the past, but we're still looking at those opportunities.

GlobeSt.com: Where do you see the most growth potential as we close out 2016 and move into the new year?

Mattox: We're pretty narrowly focused on industrial projects, small and mid-bay. We're under contract to do a 140,000-square-foot multi-tenant industrial development project, but there's still room in select cases. Ground-up development entitlement is unbelievably difficult, especially in California, so it's better to buy an entitled site or one where the seller allows the developer the necessary time for entitlement. Vacancy in US. industrial is lower than ever, and it's a supply-constrained environment. Most markets we're in are in the low single digits with vacancy.

As we move into the new year, we will have a continued focus on industrial acquisitions versus construction. It's extremely expensive to build small and mid-bay multi-tenant industrial, and rents don't justify the development cost in most cases. Projects similar to Walnut, for example, that we purchased in the high $50s per square foot, would cost in the low $90s per square foot to build today, exclusive of land. In most cases, the rents that will be achieved at the property simply won't justify the construction costs.

GlobeSt.com: What else should our readers know about the multi-tenant industrial sector?

Mattox: It will be interesting to see with the election how capital gains get treated. External issues like that can have an impact—whether the carried-interest component will impact developers' and operators' disposition strategies. Interest rates will impact our business one way or another, and there are multiple opinions on that front. The owner/user is one area where we see strength, but it's been slow and steady compared to past recoveries. We're starting to see that dynamic manifest itself more quickly than it has in the past several years. A lot of owner/users are taking advantage of low-interest loans to buy their facilities to lock in occupancy costs at historically low interest rates and still relatively affordable valuations. That market we believe will be strong through next year. The investment market will be a matter of whether rents continue to grow and at what pace. Value-add returns today require reasonable increases in rents in order to create yield because going in cap rates are so low.

The industrial sector has become the hottest segment in commercial real estate. How will logistics companies keep up with the market forces of omnichannel commerce? When will new supply finally catch up with demand? Who's putting investment capital into industrial and what does the future hold? Join us at RealShare Industrial on November 16 and 17 for answers to these and other questions. Learn more.