It is no secret that industrial product is in high demand throughout Southern California, and conversion projects might be a good way to bring more supply to market. The first office-to industrial conversion project has kicked off in San Diego. Pacific Southwest Mortgage is converting a dated three-story office building that it developed in the 1970s into a state-of-the art industrial facility. The property was functionally obsolete, making it a good candidate for conversion.
“This particular site was fairly unique,” Bill Dolan, SVP at CBRE, tells GlobeSt.com. “The existing office building had some functional obsolescence, mainly it had a fairly low parking count for today's office users. Today's users are putting more bodies into spaces, and what used to work 15 to 20 years ago for parking in an office building is no longer the case. The functional obsolescence coupled with the fact that the office spaces needed a full tenant improvement. You don't get the upside in rent that the class-A buildings can command, but often times the tenant improvement costs are similar. As a result, it is becoming more and more costly for lower-end office buildings to compete.”
At the moment, conversion to industrial assets is not a trend, but the project does illustrate that there could be opportunities where it makes financial sense. “This is more of an anomaly,” says Dolan. “It will probably be more financially feasible to go to a higher and better use, but the zoning has to allow for the apartments. I don't think that you are going to see this on a wide-scale basis, but I think on a select basis, you could see a few more of these, if the circumstances align as they did for this property and this owner profile.”
Dolan says that retail properties could be a good candidate for industrial conversion projects in the future, as long as the property has truck access and dock-high loading, as some big box facilities do. “Well-located retail properties in infill locations, I think that we will begin to see some conversion projects, but they do have to have the functional specifications,” he says. “Not every retail property will, but some of them will and they will be candidates. It will be a case-by-case basis.”
In this particular instance, the owner has a long-term view of investment in the asset, making it a good capital investment that is less management intensive for the future. “They felt that it was better long term for them to scrap the building and build a modern state-of-the-art industrial building that would probably require very little capital for the foreseeable future,” adds Dolan.
While this may not be a widespread trend—yet—it does illustrate the strong demand for quality industrial product, especially product that has high ceilings, access for large trucks, dock-high loading, heavier power. “It definitely speaks to the increasing demand for industrial space, as really the demand for modern functional industrial space,” explains Dolan. “Older industrial product can be challenged with functional obsolescence that won't meet the needs for most users today. By building this new product, you have the functional attributes that industrial occupiers require, but the owners are able to get a higher-end building with better curb appeal.”
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Kelsi Maree Borland
