However, at the larger end of the space spectrum (warehouse/logistics) we see additional drivers that support our strong outlook in these three markets well into 2019. Beyond the obvious e-commerce-related changes being experienced within the supply chain, driver and chassis shortages, green truck initiatives and container-pickup policies within the ports, federally imposed drive-time restrictions and the continued vulnerability of fuel pricing will all play a role in pushing a growing number of supply-chain analysts to recommend locating their facilities closer to their consumers. The winners will be infill LA, Orange County and Inland Empire West, all of which have severe shortages of the larger parcels needed to accommodate class-A warehousing and manufacturing demands.

GlobeSt.com: Do you anticipate these trends continuing through 2018?

Birtcher: Industrial demand, especially within the larger fulfillment and consumer-product sector, will continue to be unsatisfied by supply well past 2018. E-commerce will be the biggest contributor to demand. Even as the Federal Reserve continues to increase rates to restock their war chest as one of their future stimulus tools, borrowers should continue to find rates historically attractive, which in turn should continue to support the user building-for-sale strategies being deployed by many developers/investors. We are already starting to see demand growing among manufacturing-related occupiers as the Trump Administration begins to encourage repatriation.

Perhaps it is for these reasons that in Q1 2017 Green Street Advisors placed the industrial sector at “9 p.m.” on their 12-hour Economic Cycle Clock, thus predicting that industrial has perhaps the longest runway compared to other sectors before the bell tolls at “midnight.” However, I believe that if the warehouse/logistics sector was broken out from its industrial classification, the former would be closer to “8 p.m.,” thus outperforming all asset classes with the “longest remaining runway” in this cycle.

GlobeSt.com: How does this differ from the rest of the country?

Birtcher: Southern California will always be blessed with the country's best climate and its geographic advantages of serving as America's doorstep to Asia, which is one of the many reasons why this region will continue to grow its economically diverse population. With the L.A., OC and metro Inland Empire population at just over 17 million, our industrial base of 1.563 billion square feet (according to JLL's Q1 reports) will continue to see strong organic growth and robust absorption from in-migration.

However, there are several barriers-to-entry that make it more difficult to meet demand than in most other parts of the country. The more obvious is the geographic barrier of the ocean and development challenges of our coastal mountain ranges and desert. Yet, the most challenging, which might be less obvious to some, are the significant entitlement issues associated with delivering warehouse product. Progressive cities desiring to compete for 21^st-Century jobs and enhancements in city revenues are approving “big-box” warehouses to attract high paying e-commence jobs with the possibility of also generating measurable sales tax revenues from online sales.

This is in stark contrast to residential zoning, which comes with a much higher financial cost in the form of schools, parks, police, fire and increased burden on city streets. These realities are not limited to Southern California, as the northern part of the state suffers from the same California Environmental Quality Act regulations that are begging to be revised so that occupier demand throughout our state can be met in a timely manner.

GlobeSt.com: Which areas in Southern California have a low barrier to entry for industrial development? Do these areas offer higher returns in the long-term?

Birtcher: “Low barrier” is a relative term, since all of California is burdened by the overreaching elements of the CEQA process. In this regard, the barrier is high everywhere and the number of areas that are more welcoming with an “open for business” attitude are indeed hard to find. Ironically, the cities that are placing fewer hurdles on industrial development are in the lower-demand regions like the upper desert and other “edge cities.” The barrier is compounded by the demand to place larger industrial/warehouse occupiers in infill locations closer to their consumers (with shorter truck routes), where the entitlement obstacles are more complicated.

If, in fact, edge cities have lower barriers, then one could rationalize that returns in these markets are higher to partially compensate for the increased leasing risk and lower potential for rental growth. But infill cities that have business- and developer-friendly policies are seeing the asset values in their cities exceed those of their peers, generating higher property-tax revenues for their budget and creating more jobs—amd thus disposable income—for their residents, much of which is spent in town. Contrarily, those cities with high barriers have created the unintended consequence of forcing rents higher upon their corporate citizens. But regardless of the barriers, I believe that the best long-term returns will be generated on A-plus sites located within the A-plus absorbing submarkets of Southern California.

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NEWPORT BEACH, CA—Industrial real estate demand is stronger than ever and will continue to outpace supply for at least the next several years, Birtcher Development LLC's CEO Brandon Birtcher tells GlobeSt.com. Now in its fifth generation of family ownership, the company develops speculative “big-box” warehouse facilities ranging from 100,000 square feet to 1.5 million square feet in the highest-barrier-to-entry and highest-absorbing markets of the US. Since its inception, Birtcher has acquired, managed or developed more than 65 million square feet over 260 projects valued in excess of $7 billion dollars.

We spoke exclusively with Birtcher about the outlook for industrial real estate in Southern California into 2018, how it compares to the rest of the country and which areas offer the highest returns.

GlobeSt.com: What is your outlook for industrial real estate in Orange County, Los Angeles and the Inland Empire?

Birtcher: The fundamentals that traditionally drive industrial demand are perhaps the strongest that I have seen during my 40-year development career. Job security and wage satisfaction are major components when measuring consumer confidence, and both indices appear to remain strong as we look forward to the next 18 to 24 months. Further supporting this optimism is the prospect of regulatory modifications within the banking industry that are targeted at stimulating growth within the manufacturing and service industries. This will be particularly important to the small and medium-size tenants within the industrial sector.

However, at the larger end of the space spectrum (warehouse/logistics) we see additional drivers that support our strong outlook in these three markets well into 2019. Beyond the obvious e-commerce-related changes being experienced within the supply chain, driver and chassis shortages, green truck initiatives and container-pickup policies within the ports, federally imposed drive-time restrictions and the continued vulnerability of fuel pricing will all play a role in pushing a growing number of supply-chain analysts to recommend locating their facilities closer to their consumers. The winners will be infill LA, Orange County and Inland Empire West, all of which have severe shortages of the larger parcels needed to accommodate class-A warehousing and manufacturing demands.

GlobeSt.com: Do you anticipate these trends continuing through 2018?

Birtcher: Industrial demand, especially within the larger fulfillment and consumer-product sector, will continue to be unsatisfied by supply well past 2018. E-commerce will be the biggest contributor to demand. Even as the Federal Reserve continues to increase rates to restock their war chest as one of their future stimulus tools, borrowers should continue to find rates historically attractive, which in turn should continue to support the user building-for-sale strategies being deployed by many developers/investors. We are already starting to see demand growing among manufacturing-related occupiers as the Trump Administration begins to encourage repatriation.

Perhaps it is for these reasons that in Q1 2017 Green Street Advisors placed the industrial sector at “9 p.m.” on their 12-hour Economic Cycle Clock, thus predicting that industrial has perhaps the longest runway compared to other sectors before the bell tolls at “midnight.” However, I believe that if the warehouse/logistics sector was broken out from its industrial classification, the former would be closer to “8 p.m.,” thus outperforming all asset classes with the “longest remaining runway” in this cycle.

GlobeSt.com: How does this differ from the rest of the country?

Birtcher: Southern California will always be blessed with the country's best climate and its geographic advantages of serving as America's doorstep to Asia, which is one of the many reasons why this region will continue to grow its economically diverse population. With the L.A., OC and metro Inland Empire population at just over 17 million, our industrial base of 1.563 billion square feet (according to JLL's Q1 reports) will continue to see strong organic growth and robust absorption from in-migration.

However, there are several barriers-to-entry that make it more difficult to meet demand than in most other parts of the country. The more obvious is the geographic barrier of the ocean and development challenges of our coastal mountain ranges and desert. Yet, the most challenging, which might be less obvious to some, are the significant entitlement issues associated with delivering warehouse product. Progressive cities desiring to compete for 21^st-Century jobs and enhancements in city revenues are approving “big-box” warehouses to attract high paying e-commence jobs with the possibility of also generating measurable sales tax revenues from online sales.

This is in stark contrast to residential zoning, which comes with a much higher financial cost in the form of schools, parks, police, fire and increased burden on city streets. These realities are not limited to Southern California, as the northern part of the state suffers from the same California Environmental Quality Act regulations that are begging to be revised so that occupier demand throughout our state can be met in a timely manner.

GlobeSt.com: Which areas in Southern California have a low barrier to entry for industrial development? Do these areas offer higher returns in the long-term?

Birtcher: “Low barrier” is a relative term, since all of California is burdened by the overreaching elements of the CEQA process. In this regard, the barrier is high everywhere and the number of areas that are more welcoming with an “open for business” attitude are indeed hard to find. Ironically, the cities that are placing fewer hurdles on industrial development are in the lower-demand regions like the upper desert and other “edge cities.” The barrier is compounded by the demand to place larger industrial/warehouse occupiers in infill locations closer to their consumers (with shorter truck routes), where the entitlement obstacles are more complicated.

If, in fact, edge cities have lower barriers, then one could rationalize that returns in these markets are higher to partially compensate for the increased leasing risk and lower potential for rental growth. But infill cities that have business- and developer-friendly policies are seeing the asset values in their cities exceed those of their peers, generating higher property-tax revenues for their budget and creating more jobs—amd thus disposable income—for their residents, much of which is spent in town. Contrarily, those cities with high barriers have created the unintended consequence of forcing rents higher upon their corporate citizens. But regardless of the barriers, I believe that the best long-term returns will be generated on A-plus sites located within the A-plus absorbing submarkets of Southern California.