Article by Daniel D. Williams In-fill and rehabs are a popular choice for Orange County homebuilders facing a scarcity of land. But they're also becoming one of the only choices for industrial developers who want to build here. The reason is the same: a lack of land. It's a particularly acute problem in South County. In fact, of the 16 industrial projects under construction in the county, 15 are in North County and one is in Huntington Beach, none are in South County. It has to do with the availability of affordable land, said Steve Case, senior managing director for the Southern California region of CB Richard Ellis Services Inc. Industrial land in North and West County is $12 to $17 per square foot, according to Case. Similar land in South County is a much pricier $17 to $25 per square foot. And here's the rub: About $15 per square foot is the maximum price a developer can currently pay to have it make sense to build small industrial buildings for sale, Case said. To recoup their investment, prospective developers would have to boost prices to levels buyers aren't willing to pay. So they increasingly look to the Inland Empire, where industrial land is going for about $6 per square foot (see related story, page 19). Another factor for the dearth of industrial activity in South County is desired land use. South County, based on a masterplanned design, is geared more toward residential communities. Basic infrastructure doesn't include 1 million-square-foot warehouse and distribution centers that typically require 55 acres to house the facilities. So when South County development is being considered, the tendency is to go with residential uses. They want big-box retailers, auto malls and auto clubs, said Doug Golden, managing director of Charles Dunn Co.'s Irvine office. When industrial projects are planned in South OC, they generally are for high-tech companies. There's not a lot of land zoned straight industrial to begin with, said Jim Camp, senior vice president of acquisitions and development with Voit Commercial Brokerage in Newport Beach. To make economic sense, developers put more office space in their industrial buildings and see them evolve from straight industrial to research and development. But these two-story, flex-tech spaces have been overbuilt in OC. In South County, vacant property and low demand has caused a complete standstill in the development of new space, said Robert Strom, principal with Irvine-based CIP Real Estate. Real recovery won't take place until economic growth returns. Companies are cutting workers and subleasing space to plug vacancies, Strom said. As the economy recovers, demand will increase and vacancies will be absorbed, mostly by R&D users, since distribution and manufacturing uses have effectively been priced out of this market, Strom said. Until this happens, the potential for new development in South County is remote Location is another factor. Given the established routes of transport across the region, North and West County both offer more than South County in that they provide better access to ports, airports, and railroads, particularly those in the Inland Empire, said Raphael Bostic, director of the Casden Real Estate Economics Forecast at the University of Southern California Lusk Center. But viewing industrial space as endangered is only part of OC's industrial picture. The other is the lack of space in general. New industrial building is way down. The market creaked along last year, with 33 projects totaling 1.2 million square feet being completed. That was half of 2001's activity. The 16 projects currently under way total 673,837 square feet. If we're to see new growth, much of it will come from reuse of property, said Charles Dunn's Golden. Many of North Countys buildings were built some three decades ago and are outdated and inefficient. Developers find it easier to buy existing buildings, tear down, then build. In places like Anaheim we've seen large manufacturers tear down older buildings and built new ones in their place, Golden said. One example: deRegt Development Inc. paid $7 million for roughly 12 acres of land vacated by Medtronic Inc. in Anaheim. DeRegt tore down the existing 281,500-square-foot office and warehouse building to erect a facility last year for Galleria Inc., an importer of lawn, garden and home products. Meanwhile, the bright spot for industrial brokers has been sales of small buildings, particularly to owner-users. In the fourth quarter, 85% of sale and lease deals were for spaces smaller than 30,000 square feet, according to CB Richard Ellis. Sale activity is seeing a huge boost from historically low interest rates. Typical of today's industrial deal is Impala Carpets recent buy in Anaheim. Impala paid $1.3 million for a 12,012-square-foot, single-story building in Commerce Center Anaheim. The building will serve as the company's primary warehouse and distribution facility. Aspen Properties bought Commerce Center Anaheim in 1992. At the time, the park counted 15 light industrial buildings and a five-acre parcel of undeveloped land. Aspen Properties since has converted the five acres into eight single-user buildings. Most of the industrial buildings that are being sold today in Orange County are older buildings that have been previously occupied, said CB Richard Ellis' Case. In fact, the market for older industrial buildings for sale is just as strong as the market for new buildings for sale, he added. They're just going at slightly lower prices, Case said.
February 3, 2003