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How To Navigate Southern California’s Industrial Real Estate Market Boom

25 Jan 2017

Over the past decade, Southern California has firmly established itself as a uniquely attractive site for big-name manufacturers, e-commerce companies, and traditional big-box retailers. It is the fastest-growing region in the state and home to some of the highest priced industrial property and real estate markets in the country.

As we’ve noted previously, the Inland Empire – a metropolitan area east of Los Angeles that includes Ontario, Riverside and San Bernardino – has become one of the hottest industrial markets in the country with commercial real estate tenants and purchasers acquiring swaths of property as close to Los Angeles as possible. But it’s not the only market heating up. The entire region of Southern California – that locals once knew as vacant expanses of land – now boasts enormous warehouses where retailers process, store, and distribute consumer goods throughout the country and around the world.

With more than two billion square feet of industrial real estate product, Southern California has one of the most diverse local economies in the world.   Properties are used to serve the local population and as strategic flagships for both small and large businesses.

Here is a closer look at a few key Southern California sub-markets and how they cater to different operational and logistical needs:

Valencia

Located in the northwestern corner of the Santa Clarita Valley, adjacent to Interstate 5, most of Valencia is part of a residential planned community. Because the city has no thoroughfare that runs east and west, it is not suited for big box distributors who require transport channels to distribute goods. However, because of its residential property density, Valencia is a sweet spot for small business tenants.

Vernon

Located a mere 5 miles south of downtown Los Angeles, Vernon is comprised almost entirely of industrial product.  Because it is in the center of Los Angeles, Vernon provides ideal logistical access for distributors.  The real estate product can be quite older, which is often overlooked by users who find the location impeccable.  This is why Vernon has a low vacancy rate even during recessionary times. Class B and C properties are highly likely to get leased, as there is a scarcity of product in this popular market.

Inland Empire

The Inland Empire is situated with the whole country at its fingertips, which is one of the main reasons for its high demand among big box distributors. As we recently wrote, the Inland Empire is one of the main distribution markets in the U.S. CBRE reports that the region is constructing industrial facilities across more than 16 million square feet, which comprises approximately 14 percent of all U.S. industrial space in development. Among these developing facilities, 85 percent are at least 100,000 square feet in size with the purpose of handling e-commerce order fulfillment. For that reason, it is a big box dominant market, and therefore smaller properties and ones that aren’t state-of-the-art have some difficulty leasing when the economy is weak.

Unincorporated LA County

Within L.A. County there are 88 “incorporated” cities that have their own local governments and municipalities. But there are also “unincorporated” areas within the county that are not part of any official city. Instead, the L.A. County Board of Supervisors – equivalent to a city council – governs these unincorporated areas, and local laws are found in the L.A. County Municipal Code. Because of this unique structure, unincorporated L.A. County has fewer zoning restrictions, but commercial tenants pay a premium for this relative freedom. These areas don’t have to meet any city restrictions. If your business is storing containers, for example, this alternative is appealing.

City of Industry

Buyers in the City of Industry can expect higher taxes but also better-maintained properties and land. It is also very attractive for Asian buyers. As reported by various investments groups, the Chinese are some of the largest real estate investors in the U.S., purchasing billions of dollars worth of commercial real estate and much of it in California for its proximity to China. Properties in the City of Industry are a great exit to Asian users who are willing to pay a premium for quality real estate. Hager Pacific has witnessed this growing trend up close. Over the last three years, virtually every industrial property that we have sold has been to an Asian user.

This blog is produced as a resource for real estate investors by the senior management of Hager Pacific, which includes David J. Hager, Adam Milstein, Robert Neal, and Jason Schirn.

About the Author: Robert Neal
Robert Neal is a managing partner with Hager Pacific Properties overseeing the firm’s acquisitions, renovations and dispositions. Over the course of his real estate career, Rob has been responsible for the acquisition and disposition of industrial and commercial properties valued in excess of $1.5 billion. Prior to his position with Hager Pacific Properties, he held senior positions with several national real estate companies.