In the late 18th Century, the predecessors of the Watson Land Co. received a share of 75,000 acres from the Spanish king in what eventually became the Carson area of Los Angeles County.
It took more than 200 years, but this year the company will develop its last remaining parcel. Watson will build three warehouses on 25 acres, and it expects the space will be snapped up quickly.
If so, it would be no surprise. In the fourth quarter, L.A. County’s industrial vacancy rate fell to 1.5 percent the lowest in the country.
What’s more, there’s little land left to develop new industrial space, as Watson’s history suggests.
That makes searches for space arduous undertakings, with many finally opting to stray far from their home to the open vistas of the Inland Empire or beyond.
“Virtually all of this area can tie its history back to that era when land appeared to be almost limitless,” said Bruce Choate, Watson Land’s chief executive. “But for the first time in California history, we are running out of land.”
According to commercial real estate brokerage Grubb & Ellis Co., the county’s industrial vacancy rate was the lowest in the country. Grubb & Ellis has not yet released data for the fourth
quarter nationwide, but the company said it would be next to impossible for a major market to have a lower rate. In the third quarter, when L.A.’s vacancy rate was 1.6 percent, Palm Beach County, Fla., had the second-lowest rate at 3.3 percent.
In L.A., because there’s little land, the amount of industrial construction fell by half last year. Because there’s little space, average rents increased by nearly 9 percent to 60 cents per square foot per month.
That’s excellent news for landlords, for sure, but it has put a strain on tenants. The dwindling supply of industrial space has become a critical problem for manufacturers, retailers and grocers, among others, who may find that the shipments they receive regularly are getting more irregular as their warehouses move to the hinterlands.
And with the continued influx of Asia-related import and export businesses, the industrial space crunch is only expected to worsen. Moreover, some say errant public policy, such Los Angeles’ Adaptive Reuse Ordinance, which allows for the conversion of old industrial buildings to residential and other uses, has only made the problem worse.
Now, developers and public officials alike are starting to look for solutions, from conserving what industrial space is available, to promoting construction through zoning and even exploring the construction of multi-story warehouses that have become recently popular in some crowded Asian cities.
“Almost every major growing city is in a discussion,” said Los Angeles City Planner Gail Goldberg. “In the past (in Los Angeles) there was a fairly permissive attitude in terms of converting industrial land, but there is concern that in the future we have adequate (industrial and commercial) lands to deal with our future economic prosperity.”
County crunch
Simply put, it’s hard to find industrial land in the county.
For example, last year in the San Fernando Valley there were just eight available parcels of industrial space that were more than 70,000 square feet, and all those were snatched up. The number of available parcels was down from 11 properties in 2005 and 19 in 2004, according to data from Los Angeles-based commercial real estate brokerage Colliers Seeley International Inc.
In the fourth quarter, the industrial vacancy rate in the central area of the county, with its 295 million-square-foot inventory, was a minuscule 0.9 percent. The industrial vacancy rate for the San Gabriel Valley, where many Asian-related business love to locate, was just 1.2 percent.
And it’s not expected to get any better in 2007.
“If you are local you have to bite the bullet in terms of price,” said John McMillan, executive director and industrial expert at Cushman & Wakefield Inc.
Often, firms are forced to make key concessions in order to remain in the county and stay near their desired market.
A case in point: in September, John DeGrinis, senior vice president of Colliers Seeley’s Encino office, and his colleague Patrick DuRoss, brokered a 10-year lease deal in Chatsworth for aircraft manufacturing firm Ontic Engineering & Manufacturing Inc. It wasn’t easy.
Ontic made a concerted effort to look for space in Chatsworth where it already had facilities, and it took a year to find the right property. “There just weren’t a lot of properties out there in the range we were looking for,” said Ontic president James Gerwien.
The firm eventually signed a $7.5 million lease for a 100,000-square-foot industrial space. That works out to about 63 cents per square foot, which DeGrinis said was slightly below market rate for the area. However, Ontic expects to have to renovate the building substantially another price companies must pay in the tight market.
“It’s not exactly a perfect fit. We have got some things we are going to do in there,” Gerwien said.
That kind of compromise has sent both local and national firms seeking to expand their presence in Southern California to developments at the fringes of Los Angeles County and beyond.
There are only a handful of large new industrial developments under construction in the county, with the largest by far being Majestic Realty Co.’s 400-acre Grand Crossing industrial park in the City of Industry. Others include the Carpenters Pension Trust’s 70-acre Gateway Park development near Whittier, and Golden Spring Development Co.’s 265-acre Golden Springs Business Center in Santa Fe Springs.
Grand Crossing, which is entitled for about 6.5 million square feet, already has built and leased about 4 million, and expects it will build and lease the remaining space by 2009.
“A lot of our low vacancy has to do with increased traffic coming into the ports of Los Angeles and Long Beach. One of the biggest trends we’ve seen is the number of Pacific Rim companies coming in and taking all sorts of space,” said Kent Valley, a senior vice president at Majestic in charge of leasing.
Going east
With few options in the county, many firms have looked to the Inland Empire, the region east of the county line that stretches to the Banning and Beaumont area just outside of Palm Springs and the Coachella Valley.
“We are running out of land and a lot of new industrial facilities require a ton of space. So 1 million-square-foot warehouses are becoming more common in places like San Bernardino,” said Delores Conway, director of the Casden Real Estate Economics Forecast at the Lusk Center.
However, after years of development, space in the closer Inland Empire communities is starting to fill up.
Chino had a vacancy rate of 2.4 percent and Ontario 2.8 percent in the fourth quarter, while the entire Inland Empire, which also includes the high desert community of Victorville in San Bernardino County, has a vacancy rate of 4.4 percent.
“We call Chino the Beverly Hills of the IE,” said Tim O’Rourke, senior vice president at tenant representation firm the Staubach Co.
That means companies are now seriously looking at the Banning and Beaumont area, less than a half hour from Palm Springs, all the way north to Bakersfield in the Central Valley.
For now, vacancy rates in some of those areas indicate that there is room for new tenants and users. The fourth quarter vacancy rate in the Moreno Valley and Perris region was 17.3 percent, the highest in the Inland Empire. Also, the vacancy rate in the Redlands and San Bernardino region was 11.1 percent.
Yet with projections for continued growth at the ports of Long Beach and Los Angeles it is only a matter of time before the entire Inland Empire becomes an infill market. Those kinds of projections have led the Tejon Ranch Co. to start building warehouses in southern Kern County at the base of the Tehachapi Mountains.
The Tejon Industrial Complex along the Golden State (5) Freeway includes about 2.4 million square feet of industrial space; in 2002 the furniture company IKEA International purchased about 2 million square feet of space at the facility.
“What made Ontario successful in the 1980s (for industrial development) was the agriculture labor force that translated very well into light manufacturing and distribution,” said Barry Hibbard, Tejon Ranch’s vice president for commercial and industrial marketing “There are a lot of correlations in the Central Valley and Tejon ranch areas.”
But how far from Los Angeles County are local companies willing to go?
“The state of Nevada becomes a very compelling destination,” said Bill Goodlick, president of industrial brokerage Goodglick Co. “Some companies are moving out of California altogether. There should be a focus of, ‘Hey, we can’t let all the industrial land in the city turn into apartment buildings.'”
Municipal maneuvering
Indeed, some industry experts contend that the 0.9 percent vacancy rate in central Los Angeles is at least partly the result of the conversion of older industrial buildings into residential developments.
This practice of residential conversion has been made easier by the city’s Adaptive Reuse Ordinance, which was passed in 1999 and was meant to promote the reuse and restoration of old buildings, especially those near downtown.
At the time, there wasn’t much of an industrial space crunch and the bigger concern was revitalizing downtown into a vibrant community with more residents. Indeed, many industrial buildings have been converted into loft developments, helping to restore the city’s historic core.
“The ordinance made the conversion of industrial space into residential much easier because some of the former requirements were relaxed and residential space carries a much higher premium, making it very attractive to developers,” Conway said.
Now, even one developer who used the ordinance to convert industrial buildings into a residential development says that Los Angeles city should create a policy to protect industrial land.
“It needs to be a balancing approach when we look at the benefits and burden of preserving industrial land,” said Mark Weinstein, whose company MJW Investments built downtown’s Santee Village lofts project at a former industrial site. “I think if it is a solely industrial area and the building is industrial that building should be preserved.”
Conway said that as the city loses more manufacturing jobs a city study shows that 28.5 percent of the city’s workforce does industrial work it is in danger of “losing the middle class or the lower middle class.”
With this in mind, Mayor Antonio Villaraigosa a year ago directed city staff to study the city’s industrial policies. In November, city planners and the Community Redevelopment Agency released a preliminary Industrial Land Use Policy Project report.
The report found only 8 percent of city land is zoned for industrial use (not including the port or Los Angeles International Airport) and portions of that percentage are under-utilized or do not fit in with surrounding neighborhoods.
Cecilia Estolano, chief executive of the CRA, said that a goal is to focus on areas where it makes sense to group industrial developments. This could result in a smaller percentage of industrial land that is better utilized than the current land.
A key to the policy will be the implementation of new community planning documents, which will “preserve viable industrial land” by guiding the zoning of properties in communities in concert with local residents and businesses. The planning department is currently working on eight community plan updates, including those in South Los Angeles and Boyle Heights. They will be ready for adoption within three years.
Asian influence
This much is for sure: the problem will likely get worse before it gets better.
According to commercial real estate brokers, almost half of the industrial real estate leasing activity in the Los Angeles market in the last five years has come from firms either importing from or exporting to Asia a sector of the economy growing exponentially.
Ironically, one solution to the problem could be imported from Asia itself.
Denver-based ProLogis, the largest industrial real estate investment trust in the world, is among a few builders creating multi-story warehouses in Asia. These mammoth buildings have been erected in Japan and China where space constraints make them necessary.
“It will come down to basic economics and within the next decade it is possible that the industry will see multistory facilities in land constrained markets like the L.A.-Long Beach port area,” said Arthur Hodges, senior director of corporate communications for ProLogis.
ProLogis built a seven-story, 800,000-square-foot building in Tokyo that takes up about 4 acres. By contrast, an 800,000-square-foot warehouse could sit on 39 acres here in Southern California.
Real industry officials suggest that whatever is done, the problem be tackled sooner rather than later, since solving the problems will likely require numerous small steps.
“I don’t see one simple solution,” said Staubach’s O’Rourke. “We have a huge concern because this is our business. We can’t have our blinders on.”
