COVER STORY, OCTOBER 2007

OFFICE & INDUSTRIAL ACTIVITY
The West Coast bustles with development and deals.
Brian A. Lee

From Southern California to the Puget Sound, West Coast markets are constantly on the move, whether it's employment growth, shipping and handling commerce or the population expansion that drives it all. Commercial real estate is about land, but the region’s relation to water, specifically the Pacific Ocean, is inextricably tied to the performance of the West Coast’s office and industrial sectors.

The Inland Empire

According to an August report by Colliers International, Inland Empire industrial rents, at an average of $5.58 per square foot, are the 23rd most expensive in the nation while its neighbors — Los Angeles, San Diego and Orange County — are all in the top eight in the rankings. This is just one of the many advantages of having an industrial presence in the burgeoning two-county market.

First Industrial Realty Trust Inc. has been busy in the Inland Empire. In its joint venture with CalSTRS, First Industrial has purchased more than 1,000 acres of land that can be developed into an estimated 20 million square feet of industrial space for customers needing supply chain solutions in that market.

“The Inland Empire is ideally situated at the center of the globalization trend and the related supply chain reconfiguration trend,” says Phil Bowman, senior vice president of development for First Industrial in Irvine, California. “Three specific features have attracted commercial investment to the area: people, ports and infrastructure.”

Bowman cites the approximately 19 percent population growth — versus 4 percent nationally — in Riverside County, the 163 percent increase in container shipping volume going through the ports of Los Angeles and Long Beach from 1995 to 2005, and the combination of available land and developed infrastructure found in the Inland Empire.

Perhaps no Inland Empire developer is more active than Hillwood. After several years of acquiring property throughout the market to complement its development efforts at its AllianceCalifornia project in San Bernardino, the Perot company is full steam ahead on a substantial building program in the two-county area.

By year-end 2008, Hillwood plans to complete 12 industrial buildings totaling 5.7 million square feet in four different developments in the Inland Empire — InterChange Business Park, North San Bernardino Industrial Park and AllianceCalifornia in San Bernardino, and Hofer Ranch at Ontario International Airport. Currently, 10 of those buildings totaling more than 4.3 million square feet are under construction, including build-to-suits with long-term leases recently signed with FedEx and Michelin.

Corona, California, has taken a unique course when compared to most other Inland Empire cities.

“From an economic development viewpoint, warehouse and distribution facilities have a smaller economic impact because they demand a great deal of land and only create a handful of jobs,” says Darrell Talbert, deputy director of community development for the City of Corona. “Office buildings, flex buildings or retail centers, on the other hand, will create hundreds of jobs and maximize the city’s tax base within the same footprint.”

In the early 1990s, Corona’s city council and economic development leaders decided that the city’s vacant land would best be used for retail and office development, which helps create more jobs and produce more sales tax revenue. By year-end 2006, Corona had 1.7 million square feet of Class A and Class B office space, of which less than 25 percent was constructed in the 3 years prior. Since then, approximately 1.4 million square feet of office space have entered the planning stages or are under construction, equating to a 45 percent market increase.

“The primary goal of the city was to provide more high-paying jobs for the growing residential community and attract projects that made financial sense to the city’s future growth,” says Talbert, who says the city’s business-friendly stance, its accessible location and large, skilled workforce are key advantages for business looking to start up in or relocate to Corona.

California’s Central Valley

In January 2008, a 606,000-square-foot warehouse building will be added to the 2.5 million square feet of existing product at Tejon Industrial Complex in California’s Central Valley.

In January 2008, the partnership of Tejon Ranch Company and Rockefeller Group Development Corporation will complete development of a 606,000-square-foot warehouse building at Tejon Industrial Complex (TIC), the 1,450-acre master-planned commercial development located at the southern-most tip of California’s Central Valley. The property’s warehouse and distribution uses, which will have a Foreign Trade Zone designation, are designed to serve the needs of West Coast-based logistics operators.

“Available land has become scarce in the established Los Angeles and Inland Empire industrial corridors, where most of this import traffic is landing,” says Barry Hibbard, vice president of TIC. “Warehouse developers are looking for the next logical area of California that will provide land for expansion and that has existing infrastructure, a deep regional labor pool and connectivity to both north-south and east-west transportation corridors.”

Located at the junction of Interstate 5 and Highway 99, approximately 60 minutes north of Los Angeles, the new warehouse facility will add to an industrial/commercial complex that is already home to 2.5 million square feet of existing warehouse facilities, including IKEA’s and Oneida Ltd.’s western regional distribution facilities. WalMart, Sears, Best Buy, Target, Vanity Fair and Jo Ann Fabric & Crafts also have a presence at TIC.

TIC’s land entitled for construction of up to 20 million square feet of new warehouse and industrial buildings, its location between the Ports of Los Angeles and the Port of Oakland that allows for increased efficiency and diversification, and the fact that 96 percent of California’s consumers can be reached nonstop within the current driver hours of service restrictions from TIC’s position are major advantages for its tenants, says Hibbard.

Northern California

Marcus & Millichap’s second-quarter Office Research Report details why San Francisco’s office market is so highly regarded: widespread employment growth, including office-using sectors expected to create 6,100 new positions (a 1.9 percent gain); a projected 190-basis-point decline in vacancy to 9.8 percent; an 11.7 percent climb in asking rents; and a 22 percent increase in the median office sales price to approximately $327 per square foot.

After 2 years of ownership and a repositioning effort, Sterling American Property and Hines announced in August the $247 Million sale of 405 Howard Street in San Francisco. GE Real Estate and Ashforth Pacific Properties acquired the 10-story, Class A office property located in San Francisco’s South Financial District. The selling partnership had purchased the 504,000-square-foot building from Equity Office Properties in 2005 as part of a five-building, nearly 2 million–square-foot portfolio.

“San Francisco is a technology-driven, high barriers-to-entry market,” Sterling says in a statement to Western Real Estate Business. “When the overall economy and specifically the technology sector is going well the demand appreciates very fast as has been seen recently in the 1998-2000 and 2006-2007 periods. The significant legal barrier, which restricts new construction to 1 million square feet a year, coupled with physical limitations and lack of available land for development, creates a situation where any available space gets absorbed very fast with no new supply to meet rising demand. The equation shifts to the landlord side quite quickly and those that have staying power and/or may have acquired properties during a market downturn stand to benefit tremendously.”

Sterling and Hines’ strong leasing campaign and renovations increased 405 Howard’s occupancy from 71 percent at acquisition to 98 percent at time of sale. The property’s anchor tenant is Orrick Herrington, a prestigious law firm that occupies nearly half of the building for its global headquarters.

Pacific Northwest

The strong economic performance in Oregon and Washington is certainly reflected in their bustling office and industrial sectors. Reno, Nevada-based DP Partners entered the Portland, Oregon, market this past summer with its June acquisition of 13.5 acres of land on which it will develop a speculative 262,640-square-foot, multi-tenant warehouse/distribution center. Located in the emerging Columbia Corridor on the northwest corner of N.E. Portal Way and N.E. 185th Avenue, LogistiCourt at Portal Way is scheduled for completion in first quarter 2008. The facility will be divisible to 43,680 square feet and is located just six miles east of the Portland International Airport and 13 miles east of the Port of Portland. The Portland industrial market posted a strong second quarter, pushing vacancy down 50 basis points to a 20-year low of 5.6 percent, according to Grubb & Ellis.

Heading north on Interstate 5 in Washington, there is more substantial industrial development near major ports. In July, First Industrial acquired a 45-acre land site located near the ports of Tacoma and Olympia in Lacey, Washington. Through First Industrial’s Development and Repositioning Joint Venture, FirstCal 1, with CalSTRS, the developer will build six distribution facilities totaling 780,000 square feet.

First Park 45 at Meridian Campus, First Industrial’s first speculative development in the Seattle/Tacoma market, will be situated one-half mile from the I-5 exit, just north of the state capitol of Olympia. The property’s offerings will catered to customers seeking 25,000 to 100,000 square feet for build-to-suit, sale or lease. Construction will commence in early 2008.

Also, Tarragon LLC completed Lewis County’s largest warehouse at the Centralia North Corporate Park in Centralia, Washington, at the end of July. The 718,000-square-foot, build-to-suit facility is Michaels Northwest Distribution Center and represents the fourth largest warehouse in the state. Phase I of Centralia North Corporate Park is the start of what Tarragon plans as a major warehousing/distribution center for western Washington.

Seattle’s industrial sector had a tough act to follow after its record level of absorption of nearly 10.7 million square feet, according to GVA Kidder Mathews, in 2006. The brokerage firm reported that the market’s nearly 1.4 million square feet of net absorption in the first half of the year caused the vacancy to rise from 6.12 percent at year-end 2006 to 7.11 percent, which is still below the 7.23 percent vacancy of 1 year ago.

The Puget Sound area’s employment is expected to grow by 2.9 percent in 2007 and 2.6 percent in 2008, more than double the projected growth in the U.S. economy, reports GVA Kidder Mathews. Boeing Corp. and Microsoft are key drivers of the local economy, adding on an average of about 2,000 jobs per year. The brokerage company reports that South King County and North Pierce County continue to be the most popular locations for new industrial development, with nearly 3.4 million square feet of proposed industrial space and 1.3 million square feet under construction.


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