COVER STORY, JANUARY 2005

ON A DOCK OF A BAY
Land availability, trade access and capital costs shape industrial demand.
Haley Shuler and Brian A. Lee

Western Real Estate Business recently spoke with various industrial developers and brokers to see what kind of activity is occurring in their industry. Whether it’s building big on relatively cheap land in the Inland Empire, converting old properties into smaller, for-sale condominiums in more dense markets or moving out of California in search of bigger cap rates, the western industrial market is a busy one.

Inland Empire

With access being such a key component of growth, it’s little wonder that there is so much commercial real estate development opportunity around key transportation routes and portals in the West. Aeroterm, an airport-focused industrial real estate firm, is following this formula to great success in Southern California’s highest growth region.

“Ontario is the economic engine for the Inland Empire, one of the fastest growing regions in the United States,” says Steven Forrer, executive vice president of Aeroterm in Annapolis, Maryland. “The backbone of Ontario’s economy is its logistics infrastructure.”

Pacific Gateway Cargo Center at LA-Ontario International Airport

To ensure that the necessary facilities are available to accommodate further growth in the region, LA-Ontario International Airport’s (ONT) operator, Los Angeles World Airports (LAWA), has selected Aeroterm to develop approximately 1 million square feet of logistical space with immediate apron access on 100 acres of on-airport land. The Pacific Gateway Cargo Center, as it will be called, will include warehouse, office and operations space, more than 400 truck docks, up to 16 aircraft parking stations, and more than 1,200 parking spots.

The Pacific Gateway Cargo Center will be the largest cargo-related facility in the LAWA system, which includes ONT, Los Angeles International Airport, Van Nuys Airport and Palmdale Regional Airport, says Forrer. The center will cost approximately $100 million and will be completed in a 10-year phased buildout. The first phase of airport buildings is slated for occupancy in late 2005, with leasing currently underway.

“LA-Ontario International Airport is geographically positioned to continue to serve the growing domestic cargo, logistics and trade needs of the western United States as well as to capture the U.S.-based benefits of international growth — notably the Asian economies,” says Forrer. “The nearly 100-acre project is designed to accommodate a wide range of cargo-oriented users, who demand immediate proximity to cargo aircraft in a cost-effective and secure environment that is complementary to the land uses and business environment that surround the airport.”

Sares•Regis Group (SRG) is no stranger to building industrial product in California. The privately held company is currently developing nearly 2.5 million square feet of warehouse/distribution space across four projects in the Golden State.

Rialto Commerce Center II in Rialto, California.

In March, SRG will break ground on two industrial projects in Fontana and Rialto, California, capitalizing on the high-growth Inland Empire market. In a joint venture with Newcastle Partners, SRG will develop the 1.4 million-square-foot Sierra Gateway Center in Fontana. The project consists of nine parcels of land that will accommodate as many industrial buildings, ranging in size from 40,000 to 300,000 square feet. Located at Sierra and Clover avenues, the $85 million development will be located across from a large retail center, Palm Court, and immediately adjacent to the planned Hilton Garden Inn hotel. Sierra Gateway Center will feature distribution buildings with 30-foot minimum clear heights, oversized truck courts, and dock-high and ground-level loading.

In Rialto, SRG, in partnership with RREEF Real Estate Investment Managers, will develop the 1.1 million-square-foot Rialto Commerce Center I & II. The first phase, a 435,733-square-foot distribution building, is scheduled to be completed in May. Rialto Commerce Center II, a 705,000-square-foot facility, is due to be completed in September.

“With an industrial vacancy rate of just 2 percent, the demand is there,” says Bruce Bearer, senior vice president at SRG’s Irvine, California headquarters. “Both of these projects are in well-located areas with easy access to airports, ports and major freeways. They demonstrate the migration to the eastern portion of the Inland Empire as companies seek larger parcels of land and more economical pricing.”

San Diego

Industrial development in San Diego County can be described as an “entrepreneurial hotbed,” according to Brent Jacobs, senior vice president, Life Sciences Group at Burnham Real Estate. Currently, the most noteworthy projects in the county involve major biotechnology companies building their own campus facilities.

Biogen Idec Inc. — formed in 2003 from the merger of two leading biotechnology companies, Biogen Inc. and IDEC Pharmaceuticals Corporation — recently acquired 60 acres in Ocean Ranch Corporate Center for $16.99 million. Biogen Idec is slated to complete the first phase of its 501,690-square-foot corporate campus there this month.

Additionally, the medical biotechnology company Biosite Inc. has purchased a 25.8-acre site in H.G. Fenton Company’s Fenton Technology Park, the largest master-planned business community under development in San Diego County. The company is underway on the 352,754-square-foot Phase I of its corporate headquarters that will ultimately total over 800,000 square feet. Fenton Technology Park is located in the Sorrento Mesa area of San Diego, an area popular among R&D and high-tech firms. The park will create more than 3,000 new jobs.

“The major ‘big pharmas’ are acting quickly because of the limited land availability in San Diego County,” says Jacobs. “Companies like H.G. Fenton Company — one of San Diego’s largest real estate owners and developers — are locking up remaining land and creating projects that will meet current and future demand space.” In San Diego, there is an increasing demand for multi-tenant and smaller build-to-suit facilities as well.

Though Burnham’s Jacobs sees the San Diego market as primed for companies looking to build their own facilities, Voit Development views the market as one that is conducive to the repositioning of extant property into industrial condominiums. “Redeveloping existing property into for-sale industrial condominiums is a hot trend due to the limited amount of raw land available,” says Peter Quinn, vice president of development and acquisitions at Voit Development’s San Diego office.

Voit Development recently acquired the 69,000-square-foot Chula Vista Distribution Center in the Chula Vista area of San Diego from McMann Development. It is currently redeveloping the property into 11 for-sale industrial condominiums, to be completed in first quarter 2005, that will be approximately 7,600 square feet each.

Voit will also redevelop Amistad Industrial Center in Otay Mesa in south San Diego. Voit acquired the two-building, 76,000-square-foot property from Metro International. Rehab will begin and end in first quarter 2005. The project will consist of 50 for-sale industrial condominiums with individual units as small as 970 square feet.

The Chula Vista Distribution Center and Amistad Industrial Center projects mark Voit’s entry into the San Diego market. “The company has a successful track record of entering new markets and establishing itself as a leader,” says Quinn. “Voit is currently the most active developer in Orange County, a market it entered only 5 years ago.”

Repositioning existing property into industrial condominiums is an effort to adapt to the limited availability of raw land in San Diego while meeting the needs of users looking for smaller industrial space. According to Quinn, “Low interest rates continue to fuel the demand for for-sale space that can be acquired by small industrial users.”

Phoenix and Utah

Industrial activity in the metropolitan Phoenix area is moving toward smaller user developments. “The Arizona Avenue corridor is the employment base for the tri-city area of Chandler, Gilbert and Mesa,” says Steven Schwarz, managing director of Phoenix-based ViaWest Properties.

ViaWest Properties will develop Warner Commerce Park, a 15-acre industrial development in Chandler. The eight-building, 180,000-square-foot project will be developed in two phases, the first of which will feature 104,000 square feet of freestanding buildings or industrial condominiums available for 3,000- to 20,000-square-foot users. The 76,000-square-foot second phase will be focused on larger users seeking more than 25,000 square feet. Groundbreaking for Phase I buildings, which will range from $90 to $120 per square foot, is set for spring 2005, with completion slated for fall.

Warner Commerce Park will greatly benefit from the significant Warner Road frontage, proximity to all three freeways (Loop 101, 60 and 202) serving the Southeast Valley, proximity to the highest traffic count intersection in Chandler (Arizona Avenue and Warner Road) and proximity to both high-end and affordable housing. All user types will experience flexibility and functionality through common truck wells, individual grade level loading, outside storage yards, easy maneuverability and prime access.

“Phase I of this project caters to the small industrial owner-occupant in a condominium setting,” says Schwarz. “The condo aspect allows for lower construction costs, which translates into a lower occupancy cost for the end user.”

On the sales side, ScanlanKemperBard Companies of Portland, Oregon is making headlines. Its $67.4 million acquisition in November 2004 of General Growth Properties’ 1.3 million-square-foot office/industrial portfolio was the largest brokered real estate transaction in the history of the state of Utah, says Bryce Blanchard, investment specialist for NAI Utah Commercial Real Estate in Salt Lake City.

“More sophisticated money is chasing real estate in markets like Salt Lake, which were previously dominated by local investors and selected institutions,” says Blanchard. “Cap rates continue to trend down and out-of-state money has flowed into the Utah investment market — primarily from California — in demand that has far exceeded the supply of quality investment properties.”

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