Industrial space is one of the hottest investments on the market today, especially in major transportation corridors like Southern California. Demand for these properties is being driven from both within and outside the industrial category, as many other users and investors increasingly snap up these buildings for multifamily units, creative office spaces and even hotels.
Industrial brokers lamented this trend at the 23rd Annual Real Estate Market Review & Forecast, hosted by the AIR Commercial Real Estate Association on January 27 in downtown Los Angeles. Scarce supply was on many attendees’ minds, as industrial vacancy rates hover near historic lows in L.A. and surrounding areas: South Bay (1.7%), Orange County (2.7%), Downtown (3.3%) and Central Los Angeles (2.2%). Many other metropolitan markets around the country, including Honolulu, Portland, Denver, Cleveland and Miami, are experiencing similar levels of industrial space scarcity.
But all hope is not lost. Whatever market you’re in, there are ways to get deals done. You just have to get a bit creative:
1. Look outside “the box.”
There are so many different types of warehouse, manufacturing, flex, and research and development users out there that industrial spaces no longer fit a standard description. While a name-brand hard goods supplier may need to buy or lease more than one million square feet of space—leaving them (and you) few options in today’s market—there are plenty more users who simply need 100,000 square feet (or even less) in the right area.
When available properties are scarce, it’s best to feast on a mix of small plates, rather than starve to death waiting for that turkey to come out of the oven.
2. Explore new frontiers.
While some areas like Los Angeles and Orange County may have an extremely tight industrial supply with little land available for new product, others, like the neighboring Inland Empire, aren’t out of space yet. This market boasts an industrial supply of 500 million square feet, which is half the size of Los Angeles’ market and twice the size of Orange County’s. The Inland Empire’s industrial market has also doubled in size since 2002. This market is so big, in fact, that it currently represents 14% of the total U.S. industrial inventory under construction.
Sure, the coastal cities may be more convenient or glamorous, but with room to spare, smart brokers will think on their feet and go where the action is.
3. Find a fixer-upper.
Many old and abandoned warehouses and other industrial facilities have been snatched up by other users, straining this product type’s supply, but deals can still be done by exploring infill opportunities.
There are still many obsolete properties that can be brought back to life through redevelopment and refurbishment. Watch out for these design elements that appeal to today’s owner-users and tenants:
- High ceilings with up to 36-foot clearings
- Sophisticated ESFR (early suppression, fast response) sprinkler systems
- Generous, well-positioned office spaces
- Reinforced roofs
- Computerized systems
- Eco-friendly features that can cut the cost of water and power
While we know you’re not an engineer or architect, having the knowledge of what’s hot is half the battle when it comes to infill properties.