Local Mega Developers Take Show on the Road

Monday, August 24th 2015

ORANGE COUNTY, CA – 50M SF Planned in US, Fewer Options at Home

A handful of Orange County developers are at the forefront of a big push to build dozens of cutting-edge distribution and warehouse buildings across the country.

Current and expected economic growth nationally and in Southern California has the companies ratcheting up work outside OC’s borders to levels not seen since before the last recession as opportunities in their own backyards are harder to come by, officials said.

“We want to do as much as we can in L.A. and Orange County, but there really is no land available,” said Steve Batcheller, a partner with Newport Beach-based Panattoni Development Co., whose company is one of the country’s largest privately held industrial developers.

Panattoni is one of four area companies, along with Aliso Viejo-based CT Realty, and Birtcher Goodman and Sares-Regis Group, both based in Irvine, that are building the equivalent of a large city’s worth of industrial space across the country.

The companies have an industrial pipeline approaching 50 million square feet, including projects either under way or nearing ground breaking.

That’s roughly the same size as the entire industrial base in Anaheim, the OC city with the biggest industrial building footprint in the county.

The large distribution centers and warehouses the companies have under way or have proposed also are roughly the same size as OC’s entire base of industrial buildings larger than 150,000 square feet.

There’s been no shortage of recent headlines on the area developers, with blockbuster deals and projects popping up across the U.S.

Goodman Birtcher announced in June that it signed one of the largest industrial leases in Southern California in years for a logistics center it’s building in Rancho Cucamonga. The North American subsidiary of Australia-based Goodman Group landed Georgia-Pacific to lease all of the space at its Goodman Logistics Center Rancho Cucamonga, a two-building, 1.6-million-square-foot facility under construction in the Inland Empire.

Georgia-Pacific-an Atlanta-based maker of bathroom tissue, napkins, and other paper-based products- will use the facility to support its consumer products business.

Goodman Birtcher started construction on the speculative property about a year ago, when the 75-acre project’s cost was estimated at about $150 million.

Also in June, a venture headed by CT Realty and Seal Beach-based Xebec Realty Partners kicked off construction on one of the largest industrial developments planned  in the U.S. at a site they own in Texas.

The two companies are part of a venture developing Southport Logistics Park, a $500 million industrial project about 12 miles south of downtown Dallas.

They bought the 530-acre site in 2013 on undisclosed terms under a venture they control and that now operates under the Port Logistics Realty name. The developers spent the past two years completing the master plan for the project and entitling the site.

Port Logistics plans to invest $22 million for infrastructure and to build five industrial buildings totaling more than 3.8 million square feet during the project’s first construction phase.

Sares-Regis Group said last month that it closed on the purchase of 150 acres in the San Bernardino County city of Ontario, where it’s planning a seven-building industrial development of about 3 million square feet.

It paid an estimated $55.7 million for the land, according to brokerage data.

The company has already recouped a big part of its investment in the project. Sares-Regis at the time the sale was completed announced it had landed West Chester, Pa. -based video and ecommerce retailer QVC for the project’s largest building, a 1-million-square-foot facility.

The building will be QVC’s first West Coast distribution hub and is scheduled to open by next July. QVC said it could ultimately hire more than l,000 people to staff it and that it plans to invest more than $165 million in the facility.

No Vacancy

The Ontario deal is indicative of the red-hot market for large, new industrial buildings in the U.S., particularly in the Inland Empire, according to Kurt Strasmann, senior managing director in Orange County for CBRE Group Inc.

National industrial vacancy rates for larger buildings are about 5.7%, while in the Southern California market that includes the Inland Empire, L.A. County and OC, vacancy is just 2.2%, according to CBRE’s data.

“In every major market, there’s hardly any vacancy,” said Strasmann, whose brokerage is tracking large tenants on the lookout for nearly 20 million square feet of industrial space combined in the Inland Empire alone.

The favorable economic conditions have attracted a bevy of national and international investors to the industrial sector that are helping the four OC developers fund a good portion of their recent pipeline.

Foreign wealth funds, big East Coast pension funds, U.S. banks, insurance companies, institutional advisers, and a handful of notable individual investors in OC are some of those backing the latest development surge, according to the four companies.

The developers, in addition to having a host of well-backed financial partners for their projects, share another trait: a minimal amount of ground-up development reported to be in the works in OC.

The companies have less than 1 million square feet of space under construction here, and most of that is tied to the latest phase of Panattoni ‘s Anaheim Concourse project on land once owned by aerospace giant Boeing Co.

Six buildings at the Anaheim project that total about 489,000 square feet are scheduled to be completed by October.

Panattoni would like to take on more development in OC, but opportunities are rare, and land is “getting very pricey,” Batcheller said.

Land for industrial projects in OC is approaching $40 per square foot, according to CBRE’s Strasmann.

“It’s getting very challenging for developers,” he said. “They’re having to underwrite (new projects) to near-peak values.”

Land in OC slated for industrial development five years ago was selling for closer to $25 per square foot, according to Business Journal data.

Panattoni has an active development portfolio that’s about back to the point it was at the peak of the last cycle. It broke ground on 10.7 million square feet of projects last year and plans to start another 17 million this year.

One key difference between now and the last development boom is that most of the company’s projects and most new industrial projects in general are for buildings about 500,000 square feet or larger, Batcheller said.

In the Inland Empire, for example, where nearly 20 million square feet of new space was under construction at the end of June, the average size of a new industrial development was nearly 400,000 square feet, according to CBRE data.

The typical size of a new development in that market was roughly a third smaller in 2007 and 2008, based on a sampling of brokerage data from the time.

The other difference for Southern California projects is that now, “all the activity is in the Inland Empire, for the most part,” Batcheller said. There was more in OC and L.A. during the last boom.

Among the latest company projects to break ground are a 759,000-square-foot facility in Rialto and a 486,000-square-foot building in Riverside.

Getting Creative

Inside county lines, where developable land is in short supply and expensive, some of the local mega developers are trying to find new sources of business, including creative reuse projects, and focusing more on other product types.

Panattoni, for example, is taking a page from the area’s creative-office developers to find a new niche in OC’s industrial market. It bought a 55,000-square-foot building in March on Daimler Street in Irvine for a reported $5.9 million.

The company is retrofitting the building near the Costa Mesa (55) Freeway into what it calls a “creative industrial” space, with high-end offices and worker amenities, along with warehouse space. It plans to finish upgrades this month.

“We think this could be a new prototype for the area,” Batcheller said.

The lack of ground-up industrial development opportunities in OC has CT Realty considering another product type to invest in here. It paid about $30 million last month for a three-building office complex in Lake Forest that’s home to the headquarters of Del Taco Holdings Inc.

It is CT Realty’s first office investment in OC in several years, and the company is on the lookout for similar investments in the area, according to Chief Executive James “Watty” Watson .

The company doesn’t appear to have abandoned OC for potential industrial development, if industry chatter proves correct.

Industry sources say it’s reportedly working to close a deal to buy land in Fullerton that once served as the headquarters of Beckman Coulter Inc.

The 44 acres that Beckman- now part of Washington, D.C.-based conglomerate Danaher Corp., with local operations in Brea- is looking to sell could in theory hold more than 1 million square feet of industrial space if it gets necessary city approvals, according to real estate sources.

The land has been on the market for several years, during which time residential and mixed use development have been proposed for the site.

CT Realty officials declined to comment on the rumored deal.

By Mark Mueller of the Orange County Business Journal www.ocbj.com