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Industrial Real Estate Is Economically Reviving Southern California’s Inland Empire

22 Feb 2016

For many of us who grew up in Southern California, the Inland Empire was a place in between Los Angeles and Palm Springs or Las Vegas with vast expanses of vacant land. It served as a rest spot for fast food or a bathroom break on a family trip. From the mid 1980s to the present day, there has been approximately 400 million square feet of industrial product built in the Inland Empire. Amazon, Walmart and almost every major American consumer products company has a distribution warehouse in the Inland Empire. During the Great Recession, the area’s big box market was the most resilient core market with the highest amount of gross absorption in 2009 and 2010. What does this mean? The Inland Empire has become a mature market. It is here to stay as a pillar in the supply chain for many corporations.

Inland’s industrial boom

According to leading commercial real estate services and investment group CBRE, the recent demand in big box warehouses has been generated by e-commerce companies and traditional retail sellers. Predicting that online sales could account for more than one-tenth of all U.S. retail sales by 2017, CBRE reports that e-commerce companies and traditional retailers are investing in facilities that serve both storage and distribution centers to fulfill online orders. The most attractive space to satisfy both these needs is found in major inland and coastal port markets.
As a result, the Inland Empire is experiencing a huge boon to its development activity and is fast becoming 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.
Optimized for warehousing and distribution
Beyond its ideal location near two of the nation’s busiest port complexes, the Inland Empire offers several other advantages to the e-commerce sector. For starters, the region boasts access to nearly 23 million consumers. With transportation costs on the rise and manufacturing costs declining (with the help of innovation), corporations are strategically placing their warehouses and distribution centers back into densely populated areas.

This region also offers significant savings when compared with Los Angeles Country real estate. According to data reported by real estate services and investment management firm JLL, the average rent per square foot in L.A. County went from $6.11 to $7.08 from 2012 to 2014. By comparison, average rent prices in the Inland Empire were at a post-recession high of $4.68 per square foot. Furthermore, while L.A. County is nearing its capacity for sprawling 500,000 square foot facilities, the Inland Empire has the space to develop them. Space is a critical asset for large retailers that not only need to store a growing amount of product, but also to park, load, and offload trucks for the distribution process. One solution is for companies to build up rather than sprawl out, as they do in New York. But zoning laws place tight restrictions on warehousing height. The easier and more cost-efficient option is to develop in the Inland Empire, which offers the space required for optimizing warehousing and distribution logistics and where local governments are more accommodating to real estate developers than they are in Los Angeles and Orange Counties.

The Inland Empire opportunity

Recognizing the growing needs of e-commerce and traditional retailers to fulfill increasing consumer demand, Hager Pacific has strategically invested in industrial properties that optimize distribution processes. We’ve identified the growing value of the land in this region, despite first appearances that the buildings on the properties are functionally obsolete. We have invested in properties with improvements that are not state-of-the-art but have low building to land coverage ratios. The excess land is used by logistics companies to store containers, which is highly desirable. We also seek buildings with as many loading dock doors as possible and with large truck courts so that product can be easily loaded and unloaded from the building. Since users want order fulfillment to occur as quickly as possible, many prefer high throughput distribution, which does not require state of the art ceiling height.

In 2014, we bought a property in Fontana that was a 90,000 sf call center on 7 acres of land. We removed all of the call center improvements and converted the building into a distribution warehouse with several acres of excess land. Following the completion of the renovation, the property received enormous demand and quickly leased to a tenant, who cited the excess land as the reason for the property’s appeal.
When assessing opportunities in the region, our practice is to buy a property that is inferior, repurpose it, and lease it to a company that requires the space, value, and proximity that only the Inland Empire can offer.

Looking at the longer-term

How long will this industrial boom last in the Inland Empire? Critics cite the area’s poor air quality, high levels of poverty and terrible traffic as reasons that the market’s future growth will diminish. HPP believes, however, that the Inland Empire is here to stay as a major core industrial real estate market. The surrounding area’s significant population and two ports will ensure that the Inland Empire remains a highly desirable distribution market. Since Los Angeles and Orange County do not have the land or political environment to develop large buildings, the Inland Empire will remain the most appealing option in the area.

Another stabilizer is simply the high demand and relatively low supply. While there are new facilities in development, the current rate of construction is not meeting user’s needs. As a result, supply is limited, vacancy rates are declining, and rent increases are on the rise. However, as Hager Pacific has proven through our approach, there is great value in investing in older properties that can be refurbished and re-purposed to meet the needs of tenants.

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: Jason Schirn
As HPP’s Chief Investment Officer, Jason Schirn is responsible for HPP’s acquisition program in which the firm seeks to acquire approximately 1 million square feet of industrial real estate annually. Since becoming a Principal in 2011, Jason has been actively involved in the acquisition of more than 35 properties.