Industrial vacancy rates shrinking

Developers are adding distribution space in the Inland area but not a lot of buildings to house a small- or medium-sized factory.

Big-box warehouse users and manufacturing companies looking for smaller industrial buildings are finding a real estate market that is tightening, a series of recently released market reports found.

The overall vacancy rate for all industrial buildings in Inland Southern California, from large distribution centers to small factories, continued to decline in the fourth quarter. Several studies by brokerage firms and researchers estimated it at between 4.8 and 5.4 percent.

That would represent a substantial decline. According to a year-end report from real estate research group CoStar, the vacancies in this sector have dropped from 6.1 percent at the end of the third quarter and from 6.2 percent at the close of 2013’s first quarter, a decline of close to 20 percent in less than a year. CoStar’s report estimates the current vacancy level at 5.4 percent.

That might be squeezing out some smaller manufacturers who are looking for a home, people in the industry say. Last year saw several big distribution centers under construction, but not many facilities for a small- or medium-sized factory.

“We’re seeing some strong absorption, but the key is, the developers are not building replacement inventory for 100,000-square-foot buildings or below,” said John Boyer, executive vice president for the Ontario office of NAI Capital.

The tightening market for existing smaller properties comes at a time when some independent companies seem interested in buying. The number of small businesses interested in a 504 loan, a U.S. Small Business Administration-backed financing plan that allows entrepreneurs to own the facilities they operate, was up for most of 2013.

However, some of those business owners could be thwarted by the lack of inventory. Boyer said there is little space in the Ontario area’s warehouse hub for a smaller factory but some infill space farther east.

“Now developers are starting to do an ‘Aha’ ” about the need to build new facilities, Boyer said. “As the economy heals, the users who survived are looking to buy.”

Rick John, senior vice president at Daum Commercial Real Estate and president of the Inland Empire and Orange County chapter of the Society of Industrial and Office Realtors, said there’s been no shortage of new construction larger than 100,000 square feet in the area.

“For smaller buildings, there’s demand without supply,” John said. “Our market has not put any product out for these smaller buildings in the last five years.”

Part of the issue is price, John said. Developers frequently still believe the risks don’t justify the investment.

Also, part of the issue is traced to residents who don’t want industrial properties in their areas, said Bruce Springer, a senior vice president with Lee & Associates.

“The roadblock is the entitlement process, from California and from cities and counties,” Springer said. “It’s onerous, and it makes it difficult to build manufacturing buildings.”

California commercial real estate bouncing back, expert says

While the commercial real estate markets appear to be improving, there is no shortage of distressed properties.

The status of commercial real estate markets in the nation, California and San Diego County was the topic of a California Commercial Alliance meeting Friday at the Manchester Grand Hyatt in San Diego.

Lou Lollio, commercial issues chairman for the California Association of Realtors, said he can gauge how well the economy is doing by the number of cranes he sees.

"We are even seeing this happen in the San Diego area," Lollio said.

Lollio, who said he has been through three recessions, cited a CoStar Group (Nasdaq: CSGP) report that said in a general sense, commercial markets should continue to strengthen for the next five to eight years.

Lollio said that while office properties tend to lag the other asset classes, they are becoming a very good buy.

"Institutional monies are significantly underinvested in these properties," Lollio said.

Oscar Wei, a California Association of Realtors economist, said that although office markets are improving, investors need to be aware of the shrinking amount of required space per employee.

Wei, who said the average amount of space per employee was 225 square feet in 2005, said this had dropped to 150 square feet by 2010 and will be about 100 square feet in 2015.

Although submarkets such as Otay Mesa are still experiencing a very slow recovery, Lollio said, he expects a major improvement in the industrial markets generally.

Wei agrees.

"Industrial space is what's up and coming," Wei said.

Wei said apartment sales have continued to boom -- climbing by about 14 percent year over year.

"There's a lot of pent-up demand in multifamily," he said, adding that the national apartment vacancy is about 4.1 percent, about the same as San Diego's, depending on the survey.

As for retail, Wei said leasing is strong in the high end and the low end of the spectrum, but those in between have continued to suffer.

"The middle has just been stagnant," Wei said.

Commercial real estate markets may have improved generally, and the number of lender-owned properties may be significantly less than a couple of years ago, but Ray Mclaine, CEO of the Commercial REO Brokers Association, warns that these numbers are going to climb again.

While it might sound troubling that REO sales will increase, Mclaine likened it to what has been happening on the residential side.

"Banks didn't follow the rules," he said, adding that he saw markets where there would be 500 lender-owned homes for sale one year and 125 bank-owned homes the next.

"They just pulled these homes off the market," Mclaine said.

He said despite all the concerns about Commercial Mortgage-Backed Securities, "commercial REOs never came to market as anticipated."

Mclaine said the commercial properties "will get caught up in 2015-2018. 2014 will be one of the largest REO sale years for a while."

He said along with a pent-up supply of REO properties the activity will be boosted by the fact that at least $300 billion in troubled CMBS loans that are scheduled to mature the next three years.

"About 40 percent of these are underwater," McLaine added.

Jon Coupal, CEO of the Howard Jarvis Taxpayers Association, came to the session to blast any type of split roll tax. An example of such a tax is AB 59, by Democratic Oakland Assemblyman Rob Bonta, which would allow a school district to impose different parcel tax rates depending on whether a property is residential, commercial or industrial.

SCA 3 by state Sen. Mark Leno, D-San Francisco, would allow school districts, community college districts and county offices of education to impose, increase or extend parcel taxes with a 55 percent threshold rather than the two-thirds requirement under the current statute.

Coupal, who contends that California would be in worse shape if Proposition 13 weren't approved in 1978, argues that split-roll proposals such as these are the greatest threat to Howard Jarvis' tax measure since its inception.

"The public was asked whether the protections provided to residential properties should be extended to commercial, and the voters said ‘yes,’” Coupal said.

Coupal added that since Democrats have a supermajority in the California Legislature, it also would be easy for them to lower required threshold for a tax from the current two-thirds majority to 55 percent.

"This would be a real sock to commercial properties," Coupal said. "It would also be an administrative nightmare."

Langley emerges as hot prospect for business developers

Summary: Vancouver based Madison Pacific Properties purchased 12 office/industrial properties for $60 million, including three in Langley, where Madison hopes to capitalize off of the otherwise expensive real estate for regional industrial manufacturers who want to shift eastward toward lower leasing costs, but are stifled by the Agricultural Land Reserves surrounding Vancouver.  Specifically, the Langley neighborhoods of Clayton Heights and Willoughby are growing at "unbelievable rates" according to Cushman Wakefield Senior VP of Industrial RE.  (He projects future growth in Pitt Meadows, Abbotsford, and Mission.)

The 700-acre Gloucester Industrial Park, in northeast Langley on the Trans Canada, and connecting to all major railway lines, goes for $950,000 to $1.1 million per acre plus development cost charges and site preparation.Photo by: Handout, Cushman Wakefield

Vancouver --(Vancouver Sun)--

In a blockbuster cross-Canada deal of more than $60 million, Madison Pacific has bought 12 office/industrial properties, including three in Langley. With the Agricultural Land Reserve severely limiting development closer to Vancouver, the Fraser Valley township is fast emerging as a B.C. commercial real estate hotspot, according to industry experts.

“The Langley site in particular is strategic in that it represents 21 contiguous acres of land with over a kilometre of frontage on the Trans-Canada Highway,” says Robert Gritten, principal at Avison Young, which led the 12 deals for Madison Pacific. “As Madison Pacific invests for the long term, the opportunity this site offers for redevelopment is dramatic.”

Like all properties in the deal – to a total of 540,000 square feet of office/warehouse/enclosed storage space on 98 acres of land – the Langley ones have only 13-per-cent site coverage, compared to traditional industrial averages of 40-50 per cent. All are tenanted by Burnaby-based Taiga Building Products.

Referring to “the stifling effect” on Metro Vancouver of the ALR restrictions established by the Barrett NDP government starting in 1973, Gritten says: “As a result of this supply-demand imbalance, yes, we are more expensive than most, if not all, markets in North America. The geographic advantages that make this city such a great place to live actually work to a disadvantage when we attempt to meet the demand of our industrial manufacturers and distributors. They want and need to be here. We are the gateway for Canada to Asia, but it is so difficult to secure suitable premises for most of our user clients.”

No surprise, then, that developers are turning hungry eyes to Langley, with “its good supply of vacant land,” Gritten says. “It’s a natural extension.”

“In looking at demand in the Lower Mainland, we’re seeing a substantial eastward shift,” says Bill Hobbs, senior vice president, Industrial, with Cushman Wakefield. “Based on the tight supply, one looks farther out in valley. Port Kells [in northeast Surrey] has been substantially eroded in terms of available product. There’s significant eastern migration into Langley Township.”

Hobbs sees the Langley neighbourhoods of Clayton Heights and Willoughby “growing at unbelievable rates” as businesses shift east. The 700-acre Gloucester Industrial Park, in northeast Langley on the Trans Canada, and connecting to all major railway lines, goes for $950,000 to $1.1 million per acre plus DCCs (development cost charges) and site preparation.

For Madison Pacific, the nation-wide deal through Avison Young “was an opportunity for us to acquire a geographically diverse portfolio with good leveraged returns in properties that have long-term additional development potential,” says President and CEO Marvin Haasen. “One of our objectives has been to expand beyond the Lower Mainland where the majority of our assets are located. We have achieved this objective with the purchase of this portfolio, as 60 per cent of the properties are located outside the Lower Mainland.”

Still, Haasen says, “there continues to be strong investor interest for Lower Mainland properties. Demand is high while the supply of available properties is limited, so pricing is more aggressive.” He likes the three Langley properties for their “strong fundamentals.”

For Hobbs, the increasing strength of Langley was inevitable from the moment politicians completed their “tightly drawn” ALR lines in 1975. “I’ve been calling this one for 26 years” – his time in the business to date. “Now we’re seeing a doubling of the population. Now all of a sudden we’re going to see continued growth in the next one to two decades.”

According to a Cushman Wakefield document, Langley’s economy is not only fast-growing but increasingly diverse, with a favourable tax base, skilled labour force, state-of-the-art manufacturing industries, a strong retail and service sector, and many internationally operating and export-oriented companies moving in. These factors, plus “the proximity of Langley to Vancouver, Seattle and overseas markets have made the Langley area attractive for investment and development.”

But the migration isn’t stopping at Langley. Watch for a surge into Pitt Meadows and Abbotsford, and even north into Mission, Hobbs predicts.

The other properties acquired in the mammoth Madison Pacific deal are in: Kelowna; Edmonton (two); Calgary; Sudbury, Milton and Monetville, Ontario; Boucherville and St. Augustine, Quebec.

The transaction, which closed Sept. 12, involved eight Avison Young offices across Canada. Avison Young also represented Taiga Building Products in 2006 when the portfolio was sold to Argo Ventures.

http://www.vancouversun.com/business/commercial-real-estate/Langley+prospect+commercial+real+estate/9027569/story.html