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COVER STORY, OCTOBER 2011
INDUSTRIAL UPDATE
Activity abounds along the West’s major transportation hubs.
Nellie Day
To connect with national and global marketplaces, the industrial sector must remain plugged into its region’s vital transportation arteries. As the three industry experts below will demonstrate, this strategy not only brings with it long-term incentives, but convenience and cost savings as well.
LAND
Southwest’s Big Box Industrial Activity Parallels Transportation Traffic
By Pat Feeney, senior vice president, CB Richard Ellis’ Phoenix office
It’s taken 3 years, but speculative construction in the Southwestern U.S. warehouse and distribution market is on the verge of making a comeback, thanks in large part to an upswing in consumer spending and renewed demand from large-scale users that want to store and process products near major transportation hubs.
Not surprisingly, the increase comes at a time when the West Coast ports, as well as the nation’s highways and railroads, all report traffic increases – some even to the point of a near return to post-recession norms. At the Los Angeles Port, for example, shipping volume that had dipped to 6.7 million TEU (twenty-foot equivalent unit) containers in 2009 was back up to just shy of the port’s 2008 level of 7.85 million containers by the end of 2010.
The increase in port traffic has had a direct effect on the Inland Empire’s already tight warehouse and distribution market, where vacancy in the Western Inland Empire submarket is a mere 5.5 percent as of mid-2011.
Low inventory and a desirable location helped the submarket hold up relatively well during the recession, aside from a moderate drop in vacancy and a fairly precipitous plunge in rental rates during 2009. But with only one building larger than 500,000 square feet left in the product inventory, Inland Empire developers have finally felt the timing was right to pull the trigger on speculative construction.
Construction began earlier this year on three spec warehouse buildings. One of the three projects, which is being developed by Hillwood, already has a buyer. T.A. & Associates, in a presale agreement, has committed to pay $74 a square foot for the development, which is scheduled for delivery in 2012.
In the Phoenix warehouse and distribution market, however, developers have been a little slower to jump back into the spec construction pool. But, that day is coming soon, maybe even as early as next year.
Phoenix, in many ways, has been the beneficiary of the Inland Empire’s extremely tight big box industrial inventory. The lack of space, combined with California’s strict regulatory environment and Phoenix’s relative proximity to the ports, has encouraged a steady stream of user activity flowing into the southwest Phoenix warehouse and distribution submarket.
Blessed with excellent rail and highway access, Phoenix has seen demand for large warehouse and distribution buildings rise in direct proportion to the increase in railway and trucking traffic that ferries goods between Phoenix and the rest of the United States, especially the Inland Empire. In 2008, there were 13 buildings that could accommodate a 300,000-square-foot or larger user. Today, there are two.
Internet fulfillment centers, mail-order pharmaceutical companies and grocers make up the bulk of users shopping for big box space in southwest Phoenix. Amazon.com already has established a large presence in the area, occupying three buildings totaling about 1.5 million square feet within the past 3 years.
Despite the current lack of product in the marketplace, the decision point for Phoenix developers to proceed with speculative construction once again depends on several factors. One is rental rates, which currently sit at $0.28 per square foot to $0.29 per square foot net. These need to rise by about 15 percent, to around $0.33 per square foot to $0.34 per square foot, before the deals make economic sense. Developers who are able to move forward with speculative projects will have to work hard to secure financing. They’ll also have to possess a forward-thinking, “build it and they will come” mentality based on current rent comps.
The other variable that cannot be ignored is the fact that 2012 is an election year, and few business decisions seem to get made in the midst of an uncertain political climate.
Regardless, the increase in rail and highway traffic, and the corresponding increase in demand from users, that ensures the spec construction question in Phoenix really is more of a “when” than an “if.”
AIR
Industrial Real Estate and Its Strong Airport Ties
By Barry Saywitz, president, Newport Beach, Calif.-based The Saywitz Company
Today, many generally perceive our economy and the real estate markets as a continual struggle. However, there are silver linings in various submarkets throughout the Western U.S. that appear to have weathered the storm, gotten onto a road of recovery, and provided greater opportunities for investors and landlords.
When it comes to the West, the industrial real estate markets, which are tied to distribution, trucking and shipping, are in far better shape than those that have no tie to industry, workforce or amenities.
A prime example is the industrial submarkets in Los Angeles County, which are in close proximity to LAX Airport and to the Port of Los Angeles. While Southern California is the most dynamic and largest real estate market in the West, it is also composed of numerous micro-submarkets. The industrial submarket surrounding LAX has a vacancy rate that is significantly less than that of the overall marketplace.
While many of the buildings in this submarket are older and less efficient, the lack of available real estate and the necessity for those companies to be near the airport make them extremely more desirable than those in other submarkets. This is especially true when you consider the airport submarket’s ease of access, the current costs of labor, gas and transportation and the major congestion along most Southern California freeways.
This desirability extends just south of the airport to the South Bay’s industrial submarket. In this region, industrial facilities located near the Port of Los Angeles are in high demand. Many businesses that are tied to the materials and goods that arrive through the port cannot afford to be located farther away from their drop point. The additional costs in mileage, as well as the expected time delays, make it much more difficult and expensive to operate farther away from the port. Additionally, many of the third-party logistics companies have been in growth mode as more and more corporations look to outsource these functions and cut costs. This has caused increased demand in that submarket, and has buoyed the rental rates.
The same concept holds true for a few of Southern California’s other metro areas, such as Burbank, San Diego and Ontario – all of which have airports. The industrial submarkets within close proximity to these airports have lower vacancies and higher rental rates than those located farther away. Clearly, the concept of “location, location, location” adds significantly to a property’s value. This has been proven true even during struggling real estate markets.
Aside from location, there are many other amenities inherent to airport hubs that provide additional incentives for tenants. Corporate executives visiting one of their Southern California-based facilities will typically desire amenities like hotels, restaurants, fitness centers, etc. The submarkets surrounding the airport areas tend to have a greater depth of options than its outlying areas.
This is true in other Western markets like Seattle, Phoenix and Las Vegas as well. With increased pressure to control operating costs and to provide efficiencies in delivery methods and operations, companies will look to facilities that allow them efficiencies and cost savings. It is for that reason that you see these specific submarkets in the major metro areas continue to hold their grounds even through these difficult times.
SEA
West Coast Port Cities Continue to Drive Industrial Dominance
By John Carver, head of Jones Lang LaSalle’s Ports Airports and Global Infrastructure team
Though still constrained by economic upheaval, the U.S. industrial market is showing consistent—albeit fragile—improvement. Overall vacancy has dipped to 9.7 percent nationwide and positive absorption has prevailed for five consecutive quarters.
According to Jones Lang LaSalle’s new Port Index, industrial land that surrounds seaports and airports has become a first indicator of market recovery, garnering higher lease values, higher occupancy rates and stronger activity as compared to infill markets. To quantify this strength, Jones Lang LaSalle evaluated the port-centric properties’ key fundamentals, such as TEU volume, growth rate, infrastructure investment, labor costs and service by Class I railroads. The result was the Index that includes a list of the top 10 U.S. ports. Not surprisingly, five of these ports — Los Angeles, Long Beach, Oakland and Seattle/Tacoma — are on the West Coast.
Los Angeles and Long Beach
Los Angeles is the top-ranked seaport in the United States. When joined with neighboring Long Beach (ranked second among U.S. seaports), it helps create one of the top five port complexes in the world, as well as our nation’s trade gateway to Asia. Both ports command premium rents and values, drive employment and spur demand for the metro’s 1.6 billion square feet of industrial space. Though rents in the South Bay submarket dipped in 2010, they stabilized in 2011, positioning the area for growth later this year.
Volume is also on the rise, growing 19.3 percent in 2010 and 6.6 percent to date this year. This growth encouraged five logistics firms to sign leases in the South Bay for 200,000 square feet or more during the first half of 2011. Over the next five years, these tenants will also benefit from more than $1 billion in planned capital improvements. The dominance of the San Pedro ports and, correspondingly, the local port markets, is not expected to be threatened anytime soon, nor to any great degree by the expansion of the Panama Canal, with high-valued cargo and speed to market products still favoring the West Coast option. This will likely allow Southern California’s industrial marketplace to remain among the strongest in the country for many years to come.
Oakland
As the fifth busiest container port in the United States, Oakland, Calif., in 2010 handled more than 2.33 million TEUs. In the first half of 2011, it experienced a 6.9 percent increase in both imports and exports — a pace that may outperform last year’s levels. This keeps port property 100 percent occupied, and vacancy rates within a 5-mile radius at a below-market-average of 7 percent to 8 percent. Two large recent deals include a 192,680-square-foot renewal by Exel and a 100,800-square-foot lease by OneSource. Demand should only increase as the port rolls out the Army Corps of Engineers’ Army Base redevelopment project, which is expected to occur over the next 3 years. While the particulars of the deal are still under negotiation, the $18 million effort will add about two million square feet of industrial product over the next several years, greatly enhancing Oakland’s ability to service large container ships, which is vital to its competitiveness in the global shipping market.
Seattle and Tacoma
In 2010, container volume through the Ports of Seattle and Tacoma, Washington, rose a collective 14.8 percent. They continued to rise throughout the first half of 2011. This positions these ports to end the year just 5.1 percent below the peak volume levels of 2006, and well above the lows of 2009. Total vacancy has also dropped from last year’s 12-plus percent to 11.3 percent, tightening availability for the largest (500,000-square-foot-plus) buildings. Although rents have been essentially flat for five quarters, and are expected to remain so for the near future, there is no significant new speculative construction and build-to-suit activity is limited. The ports also look forward to a nearly complete, $24.5 million berth extension at the Washington United Terminals. This includes 600 feet of new wharf to support 100-foot gauge cranes and two Super Post-Panamax cranes, among the world’s largest cranes that, when installed, will allow the ports to increase ship container activity by 33 percent.
While each of these industrial ports remain under the influence of a slow-paced economic recovery, there is little that will offset their long-range promise. Cargo volume rebounded in 2010 and continues to rise in 2011. Exports — a key objective of the Obama Administration—have also grown at nearly three times the rate of imports. That makes these top West Coast ports real-time indicators for industrial and warehouse/distribution sectors across the U.S. As demand rises, these leaders should create spillover effects that benefit alternative U.S. commercial space, such as office, flex/R&D and manufacturing. In the process, West Coast ports will be in a premier position to capitalize.
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