INDUSTRIAL—Options Dim In Industrial Land Crunch

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Facing a diminishing stock of industrial property in and around Los Angeles, developers are contemplating the same types of “teardowns” that swept the posh Westside housing market in the late 1980s, when rich Angelenos snatched up mansions only to tear them down and build even bigger ones.

This time around, though, it’s less about opulence. It’s about a need to meet the tremendous demand for modern industrial facilities. Because modernizing aging industrial stock is typically not cost effective, teardowns are being increasingly looked at as a viable option.

“In terms of close-in land for industrial uses, there really is no land left,” said Jim Rabe, a principal at real estate consultant Keyser Marston Associates Inc. “If you want industrial land and want to be near where your workers are, you really have no option.”

The numbers tell the story: with 95 percent occupancy considered be “fully leased,” L.A.’s industrial market is over the limit.

According to Grubb & Ellis Co.’s 2000 year-end report, only 4.1 percent of the county’s 869 million square feet of industrial property is sitting vacant, and that miniscule supply is likely to get even sparser in the months ahead.

Delta Associates, a research arm of Transwestern Commercial Services, recently reported that the Los Angeles Basin’s industrial vacancy rate is expected to shrink to 3.6 percent this year.

This in spite of the fact that industrial developers have been adding buildings at a rate of 10 million square feet per year, a mere 1.2 percent rate of increase. And of the existing inventory, most of it is sorely outdated.

“Of the 800 million square feet, 80 percent was built over 25 years ago,” said Dick Cannon, president and CEO of Watson Land Co. “There’s a great deal of functional obsolescence in the industry.”

If the local economy remains healthy, and import/export volume at the ports of Los Angeles and Long Beach continues to increase, there will be more pressure on developers to update existing industrial buildings or, more likely, knock them down and build new ones in their place to retain tenants and attract new businesses to the area.

Real estate agents said that, while the teardown/rebuild trend looms on the horizon, owners of industrial properties still face obstacles in getting new plans approved.

Government opposition

Compounding the problems created by the scarcity of land is municipal reluctance to approve industrial development. Local governments aren’t keen on big warehouses that don’t contribute a proportionate amount of tax revenue.

“The distribution facilities are notorious for taking a tremendous amount of space and causing a tremendous amount of wear on the infrastructure,” said Corey Spound, a senior associate at The Staubach Co. Besides, he added, they are not labor intensive and don’t generate much tax revenue, unlike retail centers.

David Nazaryk, a principal at Trammell Crow Co. for Southern California, said that industrial teardowns will likely occur more frequently in cases where a particular tenant has been secured for the new building.

“What will drive the complicated projects and the risky projects will be user-related deals rather than speculative deals,” he said. “A user, when they decide they need to be located somewhere, will exhaust all possibilities.”

Cannon said that industrial developers also are at a disadvantage when it comes to governmental assistance in financing new development. A redevelopment agency is more likely to help out a large retail project than a warehouse because of business taxes generated on retail properties. He said that local governments need to step back and consider a broader perspective, or lost jobs will not only affect Los Angeles, but other parts of California as well.

“In a larger picture, jobs are just as important as retail development. It just doesn’t look like it,” he said. “If there’s not some assistance by the governmental bodies, we’re not going to be able to satisfy the demand and then, jobs are going to go to Phoenix, Nevada, Portland and elsewhere.”

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