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The Real Deal Los Angeles

Industrial-strength leasing

The most in-demand sector finds tenants eager to prelease preconstruction spaces

October 16, 2017
By Laurie L. Dove

BLT Enterprises’ $33.4 million purchase of 1650 Sunflower Avenue in Costa Mesa was the priciest industrial buy of the second quarter.

The volume of Greater Los Angeles’ industrial market construction and deliveries is at a historic high, but demand is still outstripping supply, and for many tenants, lack of available space and steep rents are keeping them from expanding or relocating.

“The Southern California industrial market has really never been tighter, and this sub-1 percent vacancy rate is almost unheard of,” said Mike Fowler, managing director of the industrial services group at Jones Lang LaSalle. “We are seeing more companies stay in place through renewal transactions and more companies increase their geographical search area for new properties. It makes it challenging to execute transactions because there is a lack of available options.”

Industry insiders agree, citing industrial tenants that want to expand but are instead renewing leases because of a lack of vacancies. As a result, commercial brokers who normally earn a living off industrial commissions are seeing fewer deals. Many brokers are now spending time helping industrial tenants expand their search areas for new property from L.A. proper to all of Los Angeles and Orange counties.

In the second quarter, industrial product leased quickly at record high rents, pushing the average asking rent to $0.67 per square foot per month, an increase of 2.9 percent from the previous quarter and 8.1 percent year over year, according to a 2017 industrial market report by Colliers.

One industrial purchase stood out from the rest in the second quarter: The 112,000-square-foot distribution building at 1650 Sunflower Avenue in Costa Mesa was sold for $33.4 million, going for $228 per square foot — about $100 more per square foot than any other transaction in the quarter, according to Colliers. The property was sold by San Diego-based real estate company Sovereign Capital Management Group (represented by Richard Putnam of Colliers) to BLT Enterprises.

Some industry insiders are troubled by the extraordinarily high price of the sale — an outlier given that the second-biggest sale of the quarter was the 170,000-square-foot space at 150 Radio Road in Corona, which went for $133 per square foot.

“I thought it was an eye-poppingly high number,” said Jeff Cannon, senior managing director of Savills Studley, who was familiar with but not involved in the Costa Mesa sale. “I can’t imagine what the exit strategy is on that building at that price. They’ll probably sell the building for a loss when it’s vacant unless they can build to higher and better use, like residential.”

The FedEx-occupied property is 100 percent leased to the company through May 2028, with annual contractual rent increases beginning in 2020.

Logistics companies and a growing number of e-commerce businesses in need of fulfillment centers are largely responsible for the skyrocketing demand in the industrial sector.

“Third-party logistics is the industrial market’s main driver right now,” Fowler said, “and those volumes are strong. UPS and Amazon have taken down a lot of space lately, and FedEx has a 10-year lease on the property at 1650 Sunflower Avenue. Any time you have a credit tenant lease [a method of financing in which the landlord borrows money to purchase the property and pledges as security the rents to be received from the tenant] on a long-term lease, it changes the buyer profile to somebody that is security-driven. To accept lower risk, they’re willing to pay more for the price per square foot.”

While FedEx opted to shelter in place to escape a tide of rising rents, the sale of 150 Radio Road in Corona showed another firm making a long-term commitment to a brand-new space. SeneGence, which manufactures and distributes cosmetics for direct-to-consumer sales, is now the owner and occupier of the property in the Corona Crossroads Business Park.

SeneGence purchased the building for $22.5 million from Conor Commercial, which was represented by Jeff Ruscigno of Lee &Associates, who said the company “needed a campus for manufacturing and warehousing.” The broker for SeneGence was Cannon of Savills Studley.

“Our client surveyed all of Orange County and the Inland Empire satellite markets, and this was the closest proximate market to L.A. at the best value for a brand-new product,” Cannon said.

SeneGence also bought an adjacent 50,000-square-foot building for manufacturing.

“We’re seeing a greater acceptance of market conditions by industrial tenants,” Cannon said. “Three or four years ago, there was handwringing at the pushing of rents [upward]. Now tenants are more prepared for the situation and are getting out in front of it in a better, more strategic way than before.”

Preleasing is becoming more the rule than the exception, Cannon said.

McMaster-Carr, an industrial goods wholesaler with a growing e-commerce platform, also committed to a space before it was constructed. The company preleased a  295,000-square-foot building in an industrial complex at 9630 Norwalk Boulevard in Santa Fe Springs to facilitate its recent expansion. McMaster-Carr was represented by Cameron Driscoll and Luke McDaniel of JLL.

The Santa Fe Springs industrial complex that McMaster-Carr has since moved into was developed by Goodman, an international integrated commercial and industrial property group that owns, develops and manages logistics, warehouse, distribution and business space globally.

“McMaster-Carr’s experience speaks to how tight the market is, with tenants leasing things before they can get built,” Fowler said. “Developers love those kind of deals because they take the risk out of the equation, but true build-to-suit transactions don’t happen often because most of the product and land in greater SoCal is developer controlled, and typically the developer will design and build as a spec-to-suit.”

And owners of industrial space aren’t falling over themselves to accommodate their tenants, either — largely setting the terms of leasing deals.

“There are fewer concessions — less free rent and fewer improvements — for tenants,” said Fowler. “It’s even rare to find a landlord willing to do a short-term lease. Most will be at least five to seven years.”