Building on Growth in Southern Cal

Building on Growth in Southern Cal

Industrial real estate activity is picking up in Southern California, and that’s a good sign for the economy and for shipping — the 1.5 billion-square-foot market is a bellwether for warehouse and logistics operators nationwide.

Much of the activity is linked to the ports of Los Angeles and Long Beach, where container volumes grew 15 percent in 2010 after falling more than 20 percent from late 2009 through 2009.

Watson Land, with properties in the harbor area known as the South Bay and in the expansive Inland Empire about 50 miles east of Los Angeles, began seeing increased leasing activity in early 2010, presaging last year’s sharp upturn.

It started with short-term leases, and as the year progressed, about 50 percent of the leases turned into long-term contracts, said Lance Ryan, vice president of marketing and leasing. “Activity really built up around the holidays,” Ryan said, and leasing continues this year.

Third-party logistics companies have driven much of the post-recession business. As in the residential market, prices for industrial real estate dropped substantially from the 2007 peak, so 3PLs grabbed the good deals, said Scott Weiss, director of business development at Lakeland, Fla.-based Saddle Creek. “It’s a buyer’s market, he said.

Port-related industrial real estate in Southern California falls into several markets based on the distance from the harbor. The South Bay region close to the ports is almost built out and hardly experienced a recession. The vacancy rate rose to about 4.5 percent in 2009, but by the end of 2010, it dropped to 3.5 percent.

The Inland Empire suffered dearly during the recession. Several properties of 500,000 to more than 1 million square feet came on line just as port volume was plummeting. “Real estate fundamentals were falling apart,” Ryan said.

In the Inland Empire west, vacancy rates shot up to more than 15 percent, but have since retreated to about 7 to 8 percent, Ryan said. In the Inland Empire east, which is even farther from the ports, vacancy rates hit about 22 percent, and have since come down to about 13 to 14 percent.

The rebound in the Inland Empire is good news for newer industrial real estate hubs such as Kern County north of Los Angeles. When the Inland Empire gets tight, interest in that region picks up.

Some previously started projects came on line in 2009 during the depth of the recession. Last year was quiet, but activity in 2011 is picking up, said Melinda Brown, director of Kern County Economic Development

With cargo volume at the ports growing steadily, logistics companies are coming in with a greater sense of urgency, hoping to break ground in late 2011 or early 2012 and opening facilities in 2012 to 2103, Brown said.

Kern County developers such as Tejon Ranch attract port-dependent retailers, including IKEA and Famous Footwear. In addition to processing imports, the warehouses outside the congested Los Angeles basin serve as regional distribution facilities for the 11-state western region, Brown said.

Retailers, 3PLs and direct importers in Southern California choose a location based on factors such as proximity to the port, land and labor costs. Those decisions often involve the frequency with which an operation turns its inventory.

Drayage rates in the South Bay, such as to Saddle Creek’s facility in Buena Park, Calif., are about 20 percent lower than to facilities in the Inland Empire, Weiss said. Retailers and importers that favor South Bay location turn inventories about eight to 10 times per year.

However, real estate in the Inland Empire costs about 15 to 20 percent less than in the South Bay, so the Inland Empire attracts operations where cargo rests longer. Retailers and importers there turn inventories only about four to six times per year, Weiss said.

The Inland Empire has a surplus of properties in the 500,000- to 700,000-square-foot range, and most structures were built in the last 10 years so they can be put back into use with a minimum of alteration, Ryan said.

Although modern properties generally have ample space for truck parking, properties in the South Bay expanded container storage acreage the past few years in response to the ports’ extended gates program, PierPass. Truckers pick up containers at night to avoid the ports’ traffic-mitigation fees, but because the warehouses work only during the day, the containers are drayed to the warehouses and stored overnight in a secure yard.

Now that activity is picking up, real estate values and rents will increase as well. That is occurring for properties close to the ports, and at large, modern structures in the Inland Empire. “There is a flight to quality,” Ryan said.

For the Class A properties, move-in concessions common during the recession are scarce now. Some asking prices are increasing modestly.

Industry veterans also are watching closely the types of structures that shippers will seek as carriers stop offering customers free use of chassis. Some shippers may require less storage space but more truck bays to quickly turn the chassis and container.

However, 3PLs shouldn’t be affected because they are used to turning equipment quickly. “Our job is to unload the container in less than 24 hours,” Weiss said.

Contact Bill Mongelluzzo at