Economic diversity, logistics infrastructure spur low vacancy, high demand Article by John Loesing Despite a sluggish year for commercial real estate both locally and nationally, the Los Angeles County industrial market continued to hold its own in 2002. The county ended the year with the lowest industrial vacancy rate in the nation at 4.3 percent, according to Grubb & Ellis. Brokers and developers with interests from the shipping ports all the way to the Inland Empire agree: Industrial real estate in the Southland is a well-oiled machine that appears to have defied gravity. Vacancies in office buildings, for example, are four times what they are in warehouses and research-and-development flex structures. Only the Westside experienced negative absorption in 2002. This momentum should carry the industrial sector in the Los Angeles Basin throughout the coming year. "If you talk to people, you'll find we have all the right ingredients in Los Angeles for a strong industrial market," said David Prior, president of the The Klabin Co., a Los Angeles-based firm that leases industrial buildings from Santa Monica to Long Beach. "We have the ports, we have the airports, and we have a lot of technology-defense companies that were not impacted like Northern California," Prior said. "We're not in a real estate recession. We're in a high-tech, Wall Street recession," he said. Diversity and Infrastructure Overall industrial activity in the Southland has seen steady improvement after hitting four-year lows in late 2001. The five-county region escaped the brunt of the 2001-02 recession by adding 22,900 jobs last year, the Grubb & Ellis report said. The area will add another 133,500 nonfarm jobs this year. The growth will come thanks to strong international trade, increased defense spending and a rebound in the movie industry. With regards to foreign trade, the combined ports of Los Angeles and Long Beach are the busiest in the nation, with an estimated $220 billion in commodities passing through customs last year. More than 50 percent of the Los Angeles County industrial space is located near the Alameda Corridor, the new railroad line that connects the two ports to the transcontinental rail network. The corridor, along with a proposed $576 million expansion at the Long Beach port, will increase demand for warehouse and distribution facilities throughout the region, analysts say. "The import volume that comes through the Long Beach and Los Angeles ports is massive," said Kirk Johnson, senior vice president of the Los Angeles-based Watson Land Co. "The industrial market in Los Angeles County that directly benefits from that two-way trade is really the distribution and logistics business." Impediments to growth still exist, however. Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., said the new rail line isn't a magic bullet for Los Angeles' industrial economy. Trucks, for example, are still clogging area freeways, adding to delays and overall costs. "The freeways were designed for the movement of people, and all of a sudden they've become critical corridors for the movement of goods," Kyser said. "The other thing is once you get to the end of the Alameda Corridor, there are concerns about congestion on the rail routes," he said. Bold New Buildings The amount of industrial space built last year in Los Angeles County decreased by 41 percent because of the recession, but some companies are breaking ground. Watson Land sees big opportunity in the South Bay, for example. In Carson, the company has developed Watson Industrial Center South, a 350-acre master-planned business park comprising 6.6 million square feet of Class A industrial buildings. With proximity to both ports, Watson's tenants can minimize their drayage, or container transport costs, Johnson said. Leggett & Platt, a die casting manufacturer and Fortune 500 company, agreed to take 219,100 square feet at the business park in a 71/2-year lease valued at $8.3 million. In the past year, Watson has touted its state-of-the-art Legacy Series buildings, which are available not only at the Industrial Center South but also at the 115-acre Watson Corporate Center in Carson. The complex mixes office, light manufacturing, warehousing and distribution structures with build-to-suit opportunities. The Watson Legacy buildings have 32-foot clear height, providing customers with greater cubic-foot storage capacity. "If you put size aside, I think what people are looking for are modern buildings," Prior said. "People are willing to pay the price to lease new buildings." Watson also broke ground last year on the final phases of the Dominguez Technology Center, a 438-acre development with attractive new buildings ranging from 50,000 to 500,000 square feet. Despite the vicissitudes of the market, Johnson said his company is taking the long-term approach to industrial development. "Our exit strategy is to hold," he said. "Our whole goal is to build a quality product that exceeds market standards, occupy the building with a strong customer that we can partner with, and then we continue to hold the asset and manage the asset." Watson anticipates adding 2.2 million square feet of buildings - both build-to-suit and speculative construction - during the next five to eight years. This year, Johnson said he expects asking rents in the county to hold steady in the mid-to-high 40 cents per square foot range. Prior predicts that this year could be a breakout year with high-end rents well over 50 cents. "The optimistic side of me says a number of companies have been putting off long-term commitments for some time," Prior said. "When the velocity returns to the marketplace for leasing, I think you're going to see a pretty fast turnaround because there aren't that many buildings." Klabin Co. spent last year leasing the new ProLogis Park in Torrance, a four-building industrial park with structures up to 675,000 square feet. The complex is now fully occupied, Prior said. Also new to the market in 2002 was the 100-acre Pico Rivera Commerce Center, the largest project of the year in the Central Los Angeles area. Developer of the 1.9-million-square-foot industrial park was the Irvine-based Sares-Regis Group. The Central, or Mid-Counties, market comprises 364 million square feet of industrial space. The tightest submarket in the region is Vernon, which has an overall vacancy rate, including sublease space, of less than 3 percent. In the city of Commerce, Overton Moore Properties is developing a 750,000-square-foot master planned business park adjacent to the Citadel factory outlet complex. The $40 million distribution and manufacturing park is 100 percent speculative, although the Gardena-based developer had occupants for more than 50 percent of the project before construction began. Overton Moore, which has developed more than 25 million square feet of industrial, commercial, retail and mixed-use projects throughout the region, is continuing to add to Los Angeles County's 885 million-square-foot industrial market. The firm is developing the $90 million, 1.9 million-square-foot Port of Los Angeles Distribution Center in San Pedro; Cross Pointe, a 170,000-square-foot high-tech facility near the Los Angeles International Airport; and the Douglas Technology Centre, a 216,000-square-foot dual purpose office and light assembly building in El Segundo. Firms Eye Inland Empire The improvements at the ports and in the rail corridor have implications for many points east, not just Los Angeles County. "The region's ports and manufacturing sector will improve in 2003, creating more demand for industrial and warehouse space in the Inland Empire, especially in the Ontario Airport area, which remains recession proof," said Raphael Bostic, director of the USC Lusk Center Casden forecast. Overall tenant activity remained brisk in 2002 but wasn't able to match the record-breaking pace of the previous years, analysts said. Still, with developable land and a strong pro-growth posture that includes housing construction, San Bernardino County and Riverside County are expected to be the unsung heroes of Southland industrial real estate this year. "The Inland Empire becomes more of a regional or national market where the users are aggregating more spaces in the 300,000-to-500,000-square-foot range to handle their logistics front," Johnson said. "Typically what happens is those goods are continuing east from that point, whereas if they land in the Los Angeles County Basin, they're really the hub to service Los Angeles County only," he said. For goods moving inland, the warehouses located in the two-county region are proving to be an excellent jumping off point. Institutional Opportunities For institutional developers, 2003 promises to be a busy year in Los Angeles. The 800 pound gorilla will be the Los Angeles Unified School District, which received voter approval in November for $3.3 billion in bonding to continue its school construction program to add 79 new schools as part of 160 construction projects. The district's school construction efforts were further bolstered by the successful passage of a $25 million statewide school construction bond measure in November, which the district will use to leverage it construction campaign. The district has acquired nearly all of the new construction sites, often through exercising its powers of eminent domain in the mostly built-out city. Also the future of the troubled Belmont campus may be decided this year. The district has all but dropped the project after an earthquake fault was discovered running through the property. A new proposal has been floated to sell the property and redevelop it commercially. The LAUSD is not the only educational entity in Los Angeles looking to expand. The Los Angeles Community College District approved earlier this month a $980-million bond measure to finance campus renovations. The bond measure, which is expected to appear on the ballot in May, was approved to offset anticipated state funding cuts due to the state's nearly $35 billion budget shortfall. Chancellor Marshall Drummond said the district would consider buying and then reselling its downtown headquarters to terminate its $2 million-a-year-lease. One of the largest hospital projects to break ground in 2003 will be the new Los Angeles County+USC Medical Center Replacement Facility. In December, the county Board of Supervisors selected a joint venture between McCarthy Building Cos. Inc., Clark Construction Group Inc. and Hunt Construction Group, MCH, to serve as general contractor for the 600-bed, 1.5 million-square-foot facility to be located next to the existing hospital. The replacement hospital, which was designed by a joint venture between HOK and LBL Associated Architects, will break ground in the spring and is scheduled for completion in 2007. "All of us with MCH look forward to working with the Department of Public Works and the entire project team to deliver an on-time, on-budget, state-of-the-art facility that will service the resident of L.A. County for decades to come," said Richard Heim of Clark Construction. There are several major institutional projects to watch in downtown this year, including the competition of the Gold Line commuter rail connecting Pasadena to downtown Los Angeles and the ongoing work on the new Caltrans building in downtown Los Angeles. Beware of Government As in all aspects of business, government can be the wild card. Experts say new legislation this year might adversely affect the sales and investment of industrial real estate properties. "Ongoing problems for the California economy include the budget deficit, and a deteriorating business environment which the state Legislature has yet to acknowledge," the Los Angeles Economic Development Corp. said in its 2003 area economic outlook. Kyser is particularly concerned about the possibility of "split-role taxes" coming out of Sacramento in which the value of commercial real estate would be reassessed for tax purposes whenever there was a 50 percent change in ownership. "The idea is that, 'Oh, business has a lot of money,'" Kyser said. "For a public stock company that can be wild." Additionally, 3 percent of the total sale on a commercial property must be withheld for tax purposes starting this year. The withholding used to be on profits only. While Prior didn't see the new law as being a major problem, he did point out certain ramifications. If an office or industrial property sells for $1 million and includes a $100,000 profit, then $33,000 - equivalent to one-third of the entire profit in this example - would have to be held back for taxes, he said. On the positive side, new accelerated depreciation for tenant improvements went into effect this year, Prior said.
January 20, 2003