LONG BEACH, CA-The industrial market is leading the recovery here in Southern California versus other markets around the country, thanks to trade growth. So said Eugene Reilly, CEO of the Americas for ProLogis at NAIOP’s I.con: The Industrial Conference, held Wednesday and Thursday at the Renaissance Long Beach. “In Southern California, we are seeing an awful lot of activity in larger spaces, and a lot of demand and rent growth in that sector,” he said, “but in smaller spaces, it is still pretty weak.”
Reilly joined panelists, Bart Pucci, SVP of industrial at Grubb & Ellis Co.; Steve Batcheller, a partner at Panattoni Developement Co.; and moderator Jim Dieter, EVP of industrial operations and brokerage at Cushman & Wakefield of Illinois Inc., at the event, which drew approximately 300 attendees. What is driving demand right now in the Southern California market, according to Batcheller, is that the ports are expanding. “The ships coming over from China have been doing a thing called slow steaming, which has made the ports of L.A. and Long Beach much more competitive,” he said. “It is a global logistics trend based on the cost of shipping for China.”
Pucci points out that companies are becoming more efficient, and according to Reilly, companies have, in some cases, become too efficient. He cites stock-outs as an example, pointing out that companies can overcorrect with respect to their inventories. “I think there is room for inventory rebuilding.”
In terms of spec building, according to panelists, it’s back. “I can name probably six or seven that are going to be stacked here shortly in the Inland Empire, and there is one in the South Bay area, so there is a tremendous amount of spec that is about the take place,” said Batcheller. “A year ago, if you asked about spec, people would say three to four years, but now many spec projects are going to break ground in the next couple of months.”
These are all projects that were probably shelved a few years ago and are now being dusted off, said Reilly. “Somebody’s got to pull the trigger.”
In terms of cap rates, Reilly points out that you have to look at the price per pound and the expected total return. “If you did that, it would smooth out some of these striking numbers,” he said. “In terms of the spread between primary and secondary markets, it is pretty wide and probably historically wide, but that will compress. I think you will see more people playing in second and tertiary markets.”
The build-to-suit market is also going on, panelists agreed. “We signed on with Liz Claiborne,” says Pucci, pointing out that it had to build a creative office in L.A. “because there is so much class B and class C product in the infill areas and not a lot of A-plus, so sometimes, you have to build it.”
Batcheller adds that there are multiple requirements nationwide for build-to-suit. “Nationally, it’s probably 100 times more than a year or two years ago,” he said. “It is surprising for us because we weren’t really stacked up for it, so we are looking for people right now to do the work. No matter who wins it, there is going to be a lot of activity going on.”
Not only is it build-to-suit activity up across the US, but also in Mexico, says Reilly. “Build-to-suit is way off the charts in Mexico. Their export volumes have increased substantially,” he said.
On the manufacturing side, Reilly says manufacturing inventories in the last recession dropped more than probably ever in history. “There has been a significant recovery, and manufacturing is highly correlated to industrial demand across the board,” he said. But again, what Reilly sees as driving recovery in L.A. and the same in New York, New Jersey and South Florida, is really the recovery in trade flows. “I think the ports of L.A. and Long Beach will reach peak levels later this year.”
According to Batcheller, the consumer is driving Southern California. “More of the West Coast is being distributed from Southern California, which is why I think we are disproportionately growing here,” he said.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
