(To read more on the industrial market, click here.)
LONG BEACH, CA-"Strong and steady" was the mantra for industrial sector insiders at the RealShare Industrial West conference, held yesterday at the Hyatt. However, while industrial product remains an industry darling, it's not without its hiccups.
Besides being "strong and steady" panelists and attendees agreed that the shrinking industrial base, combined with a low amount of deals being completed, means that there can be a high degree of risk. Many in attendance wondered whether some industrial risk takers were betting the farm to save the cow.
"People are taking risks," said Jason Choulochas, regional director for Wrightwood Capital and participant in the Investment Sales panel. "Incrementally, though, are you really getting paid for that risk? With construction costs and land appreciation, we've got great rent growth, but is that good enough to compensate for those two factors? Industrial is looking almost as tight as apartments, so I wonder if the risk-return imbalance is really in the right place."
The conference, produced by Real Estate Media, publishers of GlobeSt.com, Real Estate Forum and Real Estate Southern California, played host to some 250 industrial players. Real Estate Media group publisher and editorial director Michael Desiato kicked off the daylong event, which featured topics such as the evolution of the ports; multi-tenant and industrial condo trends; public-private partnerships; and the interaction between the Inland Empire and L.A. basin.
While calculated risks seem to be a valid factor of current industrial deals, Curtis Spencer, president of IMS Worldwide, pointed to how significant a mark the ports leave on the industrial market and its place within Southern California. And, as Spencer noted, if the ports are thriving and growing, then that certainly bodes well for the industrial product type and the economy in general.
"Growth in the Long Beach and Los Angeles ports [which have increased 9.7% and 12.6%, respectively] are an excellent predictor of how the economy is doing," Spencer said. "But there are only so many TEUs [a 20-foot container] we can handle with the current infrastructure. With inter-modal growth worldwide at 6% to 8%, without the other ports growing, Los Angeles and Long Beach ports would come to a stand still."
As cargo routes get tighter, so has the amount of industrial space in Southern California; and if history is any indicator of future behavior, this could mean that more and more industrial space will be rezoned for other property types.
"In the San Fernando Valley, Orange County, Glendale and Downtown Los Angeles, industrial land is [primed] to go for a fairly reasonable price [because of] rezoning," said A. Dwight Hotchkiss, senior director of Cushman and Wakefield of California, during the Town Hall Meeting, which focused on industrial leasing, investment and development. "As commuter transportation lines have grown, people want to live along these lines. Typically, it's industrial along these rail lines, so we see erosion of industrial lands in these marketplaces."
Right now, a few solutions seem to be taking center stage in staving off industrial's shrinkage: partnerships, creative building and moving east.
"People are now doing partnerships, joint ventures and development deals," said Richard Pink, managing director of ING Clarion and a participant in the Investment Sales panel. "They're trying to do more creative deals to get our capital invested…having sellers stay in the deal, recapitalizing…with cap rates at 5% to 5.25% you need extremely strong rent growth."
Creative projects are another avenue. The concept of inland ports has become popularized as many transporters have realized the advantage of connecting them by high crossroads located near population bases. The concept seems so viable, in fact, that the high desert cities of Victorville and Barstow are considering such options. Simple drop lots that are paved and rented are also doing well, with many parties who cannot leave their cargo at the ports opting to park their containers here instead. Multi-story warehouses, many believe, will also be the next wave of the future.
"We're building seven- to eight-story facilities in China and Japan," said John Meyer, senior vice president of acquisitions for AMB Property Corp., who participated in the Evolution of Ports panel. "Given the [rise in] land prices in South Bay, that climb is going to make multi-story warehouses profitable…it is also another opportunity from a redevelopment standpoint. It would bring higher and better uses for land in the L.A. area."
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