Monthly Archives: February 2005

Overcoming Space Scarcity

 

 

 

Like its harbors, airports and freeways, the Los Angeles industrial market is becoming clogged. Buildings are scarce and sale pricing is unimaginably high. Land values and constructions costs make it expensive to build new. Meanwhile Seller’s options are limited by capital gains (although relatively low for the moment), lack of suitable replacement properties, and unwieldy ownership structures.

These circumstances are not freeing up enough property. However, there is plenty of available space. Getting it on the market in a suitable way is lacking. Despite gains in electronic and internet distribution, the business has bogged down because of a lack of thoughtful communication among real estate professionals and their clients. The solution involves more expertise. For example, a business has a building that is either too big or needs some changes to function better. But lacking the expertise to redevelop their own property, the company works with wasteful and inefficient space. An insightful solution could be a partial sale leaseback or an equity infusion to improve the building’s utility.

The owner could sell a portion of the building or do the work themselves without disrupting their business. Guidance is needed. Bill Feldman, one of the more thoughtful leaders of the industry once quipped, “what happens when the children of your partners become litigators?” In art he was referring to partner ships of an earlier generation that have grown so out of control they can no longer be effective stewards. Some of these partnerships sit with below market rents and empty space because they cannot make effective capital improvement and operational decisions.

One culprit is the internet and our methods for electronic communication. Brokers have become complacent such that if a property is not listed or does not appear in an email communication, it doesn’t exist. There is limited creative thinking on how to fill customer needs. This tunnel vision created by the electronic multiples is partially responsible for the foot race and bid up of the seemingly limited opportunities. Creative solutions to the “supply” problem include carve-ups, capital infusions, creativity, trust, and most of all, effective communication. Besides real estate, the skill set includes tax, finance, construction, legal, and personal knowledge. Brokers who should at be the center of this complex relationship are reduced to running the race to hand off a regurgitated property list.

Large brokerage houses by themselves are not the answer because despite the claim, information is often jealously guarded. Most small firms have limits because of their size. However it’s the rare individual or team that has a broad enough network of capital, construction, users, and product to put the parts together successfully. Respect and trust are critical because many of these cures will require ongoing care as the years pass.

Politics Of Trucking

The 1 million square foot air freight development in Hawthorne is being delayed, in part, by a threatened lawsuit from neighboring city of Gardena. Interestingly, the city of Hawthorne voted to exclude this one major development from its own moratorium of anti-trucking development.

The issue is truck traffic on two streets shared by each city. One city wants the development; the other doesn’t want to pay its cost. The failure to expand LAX has had a similar effect. Instead of keeping airfreight trucking at the airport, it is now spread throughout the region thereby increasing costs, delays and wear to local infrastructure.

The unincorporated County area (near Gardena) came up with its own plan. Because of voter sentiments, the County now requires a Conditional Use Permit (CUP) for outside storage on M1 and M2 properties if they border a residentially zoned property. Because the County Strip was poorly planned, the requirement for the CUP affects at least 50% of the vacant industrial land. But for individual owners, obtaining the CUP has become a costly and time-consuming burden.

When one delves deeply in the issue, there are a lot of politics. Allocation of county, state, and federal funds is one issue. Overall transportation policy is another. There are voter concerns, “to keep those trucks out of my neighborhood.” Finally, who pays for local impacts from regional developments of airports, harbors, and other major projects? The result is that local municipalities have acted in their own interest to keep trucking companies out of their cities.

The unfortunate consequence of independent ordinances causes freight companies to look for short term solutions that increase blight to the community. Many trucking companies have to accept undesirable conditions that increase costs to their customers. Unfortunately, there is no solution in sight. Unless, of course, you know how to play politics yourself.

CODA:  Five years later the political acceptability of trucking and warehousing has not improved. The cost to park trucks close to the Harbor is so high  that it is a better economic return to pave over a site for parking than to develop a brand new building.  This has turned local economic development policies upside down.