SAN DIEGO—Southern California has about twice the amount of industrial space as Northern California, but both markets are strong, Westcore Properties' president and CEO Don Ankeny tells GlobeSt.com. We spoke with Ankeny about how industrial demand looks in different parts of the state and what changes he expects to see in industrial investment in 2016.

GlobeSt.com: In which key ways do the Northern and Southern California industrial markets differ?

Ankeny: While the industrial sector lagged a bit in the real estate market recovery process, it's now in high demand throughout our state (and nation). Increased domestic manufacturing and employment have propped up industrial real estate throughout California and beyond. The Southern California market has well over a billion square feet of industrial space, and the Bay Area has about half of that, but both markets are strong. Port activity in Long Beach and Los Angeles help drive demand for industrial real estate product throughout Los Angeles and the Inland Empire—areas that have seen more industrial development than most parts of the state (and nation) during this real estate cycle. San Francisco and San Jose's industrial markets have seen remarkable rent growth, which has been driven primarily by tech and e-commerce firms. Northern California is influenced by the tech sector, with more industrial assets having an R&D feel to them. Additionally, with much of the infill product in the East Bay being older and less functional, many industrial distribution users move further east to markets like Tracy and Stockton.

GlobeSt.com: Have some particular submarkets caught your attention from an investment standpoint, and why?

Ankeny: We recently acquired and redeveloped the Kato Portfolio in Fremont within the eastern side of the Bay Area—a key infill distribution hub with good freeway access and close proximity to major air and sea ports. New industrial development in this infill location should continue to do well. We also snapped up a multi-building Pico Rivera property in Central Los Angeles, which is a low-vacancy, supply-constrained market, also with properties that can be improved and optimized. Finally, we recently acquired two industrial assets in Oakland, another dynamic market with high industrial demand throughout the I-880 corridor and vacancy rates approaching historic lows.

GlobeSt.com: Nationwide, demand for industrial product is high, from both investors and tenants. How does the California market compare, and can the market meet the demand?

Ankeny: The Bay Area and Southern California industrial markets are considered two of the top in the nation. Both have thriving sea and air ports, low unemployment, low vacancy rates and a limited supply of new industrial product. What we've seen recently and will continue to see in 2016 is a slowly growing influx of new product, but also a lot of renovation and repositioning of existing product. The healthy market allows investors like Westcore Properties that have the experience and resources to do so to update functionally obsolete or inefficient industrial buildings. This process optimizes and expands the existing supply of industrial property. Just as with all real estate, the industrial development and renovation market is cyclical, and both renovation and new development are crucial to meeting the booming demand for industrial properties in California. Markets close to major transportation corridors and ports will obviously do well, but the regulatory environment of each city can also make a difference to how much investment and development they will attract. 

GlobeSt.com: What changes do you think we might see in the industrial investment market throughout California in 2016?

Ankeny: The past four years have allowed investors to see price appreciation without actively managing and optimizing their assets. Investors may now consider some markets to be priced-out. We're starting to see foreign investors who, historically, had appetites for trophy assets in gateway cities start to consider smaller, more numerous deals and even secondary markets. 2016 and beyond will favor investors who actively manage their assets to continually reposition and/or redevelop them to meet the changing demands of their tenants. Passive and "market-timing" investors will have a harder time being successful.  Also, some markets where housing prices have outpaced what the majority of the workforce can afford may see companies migrating to other nearby markets in order to attract the talent they need. Office and industrial property demand would follow accordingly. Overall, the Bay Area and Southern California are very resilient markets. Even when the economy swings down, they tend to lead the real estate recovery. In fact, both San Francisco and Los Angeles are included in the Urban Land Institute/PwC 2016 Emerging Trends survey as markets to watch in 2016. The same survey ranked industrial as the top commercial real estate sector for investment and development prospects in 2016.