Brian Thene was looking to break into commercial brokerage at the beginning of 2020. After spending a few years working in sustainability and corporate solutions at Cushman & Wakefield, he wanted to be a dealmaker.
He cast a wide net, trying his luck in several aspects of commercial brokerage, from office to retail to multifamily.
In February, Thene heard from JLL. The brokerage had an opening in its industrial division in Southern California on a team led by veteran brokers Luke McDaniel and Cameron Driscoll. Might Thene be game?
He was. But what he didn’t know was that he was going to be working in what would soon become the hottest sector of real estate.
“It was serendipitous,” Thene said. “The market is on fire.”
The pandemic forced an adoption of e-commerce that compressed a decade’s worth of growth into a single year. E-commerce sales represented around 10 percent of all retail sales before the pandemic, according to data from the U.S. Department of Commerce. By the second quarter of 2020, almost 16 percent of all retail sales happened online. And one of the biggest beneficiaries of that shift has been the industrial real estate market, which encompasses distribution centers, last-mile warehouses and manufacturing facilities.
From Ventura to Long Beach to Orange County and out to the Inland Empire, the Greater Los Angeles market has seen demand for industrial space skyrocket, thanks to its connection to the ports of Los Angeles and Long Beach — two of the largest shipping hubs in the world.
“Industrial is sexy now,” said Jerry Sackler, a longtime L.A.-based industrial broker with Daum Commercial Real Estate. “It’s a sector that’s not going away.”
Since 2018, tenants have absorbed nearly 109 million square feet of industrial space across L.A., Orange County and the Inland Empire, according to Michael Soto, a research director at Savills.
With greater demand, vacancy is at a historic low of about 2.5 percent, and rents have hit record prices of around $1 per square foot, according to research from JLL and CBRE.
With supply choked, brokers have to work harder than ever to find space, secure off-market deals and preserve relationships with big-name tenants. Twelve-hour days are standard, with brokers constantly on the phone, trying to be the first one to snap up a coveted warehouse.
The role of a broker has become so much more “sophisticated,” said Krestina Babamuratova, an industrial broker at Savills in Orange County. From business development to managing transactions and analyzing company financials to learning about the tenant’s sector, “you have to be doing all the things.”
One-click wonder
Before the pandemic, the industrial market in Los Angeles was seeing steady growth. It had made a full comeback since the financial crisis, when companies were reluctant to expand and add space — a “tragic” time for the industry, according to Newmark industrial broker John McMillan.
Alongside the growth of Amazon and the rebound of the U.S. economy, vacancy levels across the L.A. industrial sector were starting to teeter around 3 percent.
Then came March 2020. All commercial asset classes took a hit as businesses struggled to predict how long lockdowns would last.
Across the industrial sector, “it felt like everything was on ice for two to three weeks,” McMillan said. “But then everything picked right back up again.”
Retailers and manufacturers quickly realized they needed space to meet the new demand for online shopping. There needed to be more room to store toilet paper and hand sanitizer, and people learned to order groceries, clothing and new patio furniture online.
But it’s not just about inventory.
“That package you buy online has to be repositioned multiple times, more than if it was bought at a brick-and-mortar retail store,” Tyler Henritze, Blackstone Real Estate’s head of acquisitions in the Americas, said in a conversation with Fifth Wall last October.
Tenants moved quickly, pushing vacancy rates in Los Angeles down to 1.7 percent in the first quarter of this year, according to CBRE. In the Mid-Counties — the area between L.A. and Orange counties — vacancy dropped to 0.7 percent.
Brokers agree: Thanks to a boom in e-commerce, which has propelled low vacancy rates and tight supply, it’s a landlord’s market.
Major industrial developers know this and they’re capitalizing on it. Australia-based Goodman Group and L.A.-based Rexford Industrial Realty have proposed adding millions of square feet to the Greater Los Angeles area, which already has about 2 billion square feet of industrial space, according to CBRE and JLL.
The big pivot
Although Thene entered the sector without formal brokerage experience, other commercial brokers that have traditionally focused on office and retail deals may be looking to shift their focus to industrial. But, according to veterans such as Sackler, it’s not that easy “to just jump and start from scratch.”
Industrial deals used to be relatively straightforward, according to brokers who have been working the market for years. But deals are becoming more complex.
“Leases used to be 10 pages. Now they’re at least 20,” said David Young, a broker at NAI Capital who has been working in the industrial sector for more than 30 years. A lot of legal language around protections for landlords has been added, as well as contingency clauses if the tenant cannot fulfill its lease obligations and environmental requirements.
Industrial deals require an understanding of the supply chain, e-commerce trends, facility amenities, transportation costs and a company’s financials.
“Most people think it’s just a box,” Babamuratova said, referring to a warehouse. “But there are so many things happening inside that box.”
“We got in the car and drove around to get the lay of the land,” Thene said, when discussing his training.
Executives and top brokers from JLL, Lee & Associates and NAI Capital all said they were actively expanding and were always looking to hire both seasoned and young brokers. However, at JLL, brokers usually stick to their knitting.
“Office brokers are office brokers, and industrial brokers are industrial brokers,” said Charlie Smith, the broker lead for JLL’s Los Angeles practice. This is certainly true for one of JLL’s poaches this month: Hunter McDonald, a top industrial broker in the Inland Empire, from CBRE.
Instead of hiring across sectors or having agents work across teams, brokers at JLL will partner up: If an office broker has a client with industrial needs, he or she will work with an industrial specialist.
Other firms, including Daum Commercial, are really focused on seasoned brokers, regardless of what commercial sector they have experience with.
“We like someone that can go from A to Z on a deal,” Sackler said.
Shake that product loose
During the pandemic, office and retail brokers have had difficulty finding tenants. Across the industrial sector, brokers have had to work harder to even find deals to make.
“I have to be a very good detective to find clients for-lease or for-sale product,” Young said. “I have to work to shake that product loose.”
Searching for off-market deals is becoming more important. Often, brokers will work with landlords to search for deals before space is publicly available.
On the sales side, brokers have to sift through a number of unsolicited offers.
“We’re seeing six offers on a building that isn’t even selling,” said CBRE’s Barbara Perrier.
Leasing brokers do the same with searching for tenants that can occupy any space that is available on the market. Thene said he spends much of his day on calls with prospective clients. Once he’s off the phone, he logs it into his team’s database — which has records of conversations going back to 1999.
Babamuratova only represents tenants, meaning she has to spend her time educating clients and making them understand that it is a landlord’s market, which can sometimes lead to “tough” conversations.
“There are a limited number of opportunities,” she said.
Still a man’s world
When Babamuratova started working in commercial real estate in 2008, she first thought she’d go into office deals.
Then she visited a 700,000-square-foot warehouse in Ontario.
“It’s not as glamorous as Century City,” she said, adding that she had to learn the hard way that it was difficult to tour a large warehouse in heels. “Wear flats,” she noted.
Babamuratova is only one of a few female industrial brokers in the Greater L.A. market.
At JLL, five of its 36 industrial brokers in Los Angeles are women, according to its website. Expanding out to California, nine out of 85 industrial brokers are women.
Daum’s Mid-Counties and Orange County offices have no female industrial brokers. Only one woman in a team of 24 brokers works with industrial properties at Daum’s Inland Empire office.
It’s the same story at NAI Capital: Its Orange County office has no female industrial brokers, and there’s only one female restaurant broker.
That’s not to say that women can’t succeed in the industry: Barbara Perrier and her sister Darla Longo at CBRE are both top-producing industrial brokers.
“There’s this stereotype that industrial is for men or something,” Perrier said. She and her sister both started working as industrial brokers at the suggestion of their father, a longtime manufacturing worker. “Forty years ago, there were no women in the field,” she said.
While these trends can be extrapolated to the larger commercial brokerage sector, Babamuratova thinks things are changing, especially as deals become more about math rather than networking.
As Amazon and other players continue to lure more of our retail lives online, brokers predict that rents for industrial properties will continue to rise and vacancy rates will remain at rock-bottom.
Young’s advice for an aspiring hopeful? Sit at the feet of a seasoned broker.
It worked for Thene. He said he’s able to build his client relationships thanks to the prominence of his team at JLL, as well as their database.
“Real estate is very, very small,” Thene said. “The relationships that you build now are going to last 20 years.”