Monthly Archives: June 2010

The Port Strategy Fallacy. It’s the Deal That Counts.

 

Both brokers and investors tout the strengths of investing in markets with a vibrant harbor and airport. This has been a pronounced strategy from at least 1997 when container imports began increasing beyond incremental growth. Many institutional investors have dubbed this the Gateway Strategy. But grand proclamations like these normally lead to increased competition amongst buyers and lower returns. If history is any lesson, the money was made by the first round Buyers who purchased these distribution buildings at distress. It was the following group who used port dynamics to justify their high purchases and are now sitting with vacant and poorly leased properties at rents vastly below proforma. In retrospect, it was the deal strategy that made investors money. Being located by the port was secondary. 

The Port Strategy became a marketing ploy that led to an enormous exaggeration of demand. It becomes evident as one moves further away from the Harbor, through the Inland Empire, to Las Vegas, and as far away as Phoenix. This is the route of the west coast warehouse boom, and unbelievably, developers actually marketed warehouses in Arizona as Los Angeles Port locations. It may well be that just as we saw de-industrialization occur in the 1980's, we will soon see de-warehousing along interstate routes of 10 and 15.
 
Ports do bring activity to areas that receive incoming merchandise especially in contrast to declining Midwest industry. But as consumer spending slows, the need for warehousing  diminishes. An expanding population will lead to moderate growth, but no longer to the levels predicted from the container volume boom. We've already experienced the impact from surging from Chinese production. Buying again into the port fallacy will need to wait for better evidence.
 
To make matters more challenging around the Los Angeles Harbor, many investors need to compete with an extremely large property owner who received vast tracts of industrial land for free when in service to the King of Spain at the founding of California. Normally, when there is an abundance of activity, there is enough absorption for everyone, but in a down market, the "low basis" landlord fills up first. Factors to today's leasing market has a very historical precedent. 

Likewise, students of current history will look to this period as the day of the individual deal. Finding property in these deep recessionary conditions takes place one property and one user at a time. Investors will count heavily on brokers because of the hard work and relative scarcity of opportunities. Many searchers are armed with sophisticated database and web tools to weed through broad swaths of the greater Los Angeles market. This year there have been a couple creative deals where large investors have purchased hulking, junky buildings at land value. They are able to enjoy a fair current return with bottom-of-market rents, while land banking for future development.  Another example is a breakup of a large manufacturing plant that had its component parts sold off in pieces at a profit. Mostly however, until lender forbearance wanes and bankruptcies wind their way through court, most investors will need to dig harder or look for another profession.

In the "B" market where I find myself most of the time, $.35 NNN rents conservatively equates to an investment purchase price in the high $40's and so far those types of deals are not available. If someone has a higher value estimation, we may be able to do some business together. Conversely, Users can find some opportunities in the low $60 level. I've  seen a few building examples where the mortgage payment is not much higher than rent. Plus a business can establish a permanent home with all the ancillary benefits of creating a Place. There are some excellent properties on the market that Buyers would have fought over in better times. Needless to say, the lease deals are great.

If you like the hunt and are not burdened with excessive debt this is an excellent time to look for property deals. But be careful of any stories that go with the offering. We are in a period of extreme fundamental analysis in a market that can easily decline further.