Monthly Archives: May 2011

Texas Governor Woos Vernon Businesses


You may have seen this article earlier in the week about Rick Perry inviting businesses in Vernon to consider relocating to Texas. It's not the type of press California needs as it struggles to recover. Once this news item goes viral it won't take long for other states to get the same idea to woo California business. Plus when states start looking at the economic benefits of moving companies from Vernon, the same math will apply to every city in California. Perhaps the most unsettling part of the article is that the conditions leading up to the proposed company pilfering were caused by California's own government leaders. Firstly, greedy Vernon leaders created the attention, but the Speaker of the California Assembly, by proposing to change the governance of a very successful business community, is creating the groundswell to consider alternatives. 

I recognize it is a common trend for companies to leave California. Once business reaches a certain scale, they can move to a number of different places and receive considerably lower real estate, labor and utility rates. There is lower housing prices for employees, less regulation, and mimimal permitting delays. Finally most states offer a generally more favorable business climate. In fact, there needs to be an overriding business reason to be in California, at all. Economic Development Companies regularly come to California to sell their states. 

But it's doubly dangerous today and calling attention to these inadequacies could easily create another substantial exodus. Vernon is a somewhat unique situation because it's a rare family run fiefdom that happens to give business an extremely favorable place to operate. But instead of just leaving the courts to handle the corruption cases against the city leaders, the Speaker is proposing disincorporation for the City of Vernon. In other words. changing the favorable business climate that companies currently enjoy. But added to the high unemployment rates, poor schooling, the state deficit, and other state challenges, creating this type of furor is very detrimental to California's economy. 

One California spokesperson from the Treasurer's office ridiculed the relocation efforts of other states as a Bugs Bunny cartoon. But I would rather have seen him tout the virtues of California instead of making it a joke. I have moved companies out of state and there is no comparison to the economic benefits of leaving for many types of industries. All it takes is a couple of phone calls to my friends in the Southeast, Texas, or any other state in the Union, and I can create a very compelling argument. Once my broker friends catch on to this opportunity it will again be hunting season on California business. Unfortunately, thanks to our own leaders.

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Coda – June 4, 2011

This is a longer article from the LA Weekly about disincorporating the City of Vernon. It questions the Speaker's motives about turning Vernon over to LA County for administation. But why not Bell, Compton, or Montebello. Even many departments of Los Angeles City have been tarnished with corruption scandals. Is it because Vernon has a substantial tax base in this era of fiscal deficits? Everyone wants to see corruption prosecuted, but business does not want to see its economic location decisions become a political dogfight.


COMING OUT ON TOP – SIOR SPRING CONFERENCE

 

Firstly, the mood was more upbeat and optimistic. Most people agree that the past few years were terrible but since the end of last year activity has increased. Nationwide, there is agreement that we have a bifurcated market with quality, institutional grade and trophy properties hitting 5% cap rates.  Prices for these properties have returned to previous highs. Meanwhile, everyday buildings that most of us broker are still in the doldrums.  In order to capitalize on this divergence investors are focusing on the $1MM to $5MM market where high returns exist.

The focus on the Fall Conference will be on manufacturing.  There is a belief that this part of the economy will surge as corporations realize that just-in-time delivery and logistic optimization has failed in recent years.  In addition, a lower dollar and the need for job creation will result in more on-shore manufacturing.  Lower labor and real estate costs are apparent.  If true, it will certainly improve the outlook for B and C class buildings.

Build-to-Suit is the darling of the industry as this has been the only way to finance new development. The main geographical beneficiaries have been the Southeast and Texas as aggressive Economic Development Companies showcase their region's educated workforce, low cost of operations, limited regulations, and pro-business attitude.  Unfortunately, while at the conference, California received the award for the nation's worst place to do business for the 7th year in a row from CEO Magazine. I found that smaller, well focused regions are better suited to make a strong  presentation to attract business

Major developers and investors are still focusing most of their energy on managing and improving their existing portfolio. But a few developers are starting to build on already owned land. Others are considering spec development  in selected markets where they perceive a shortage in certain product categories. Investors are beginning to re-examine the marketplace for purchasing. Overall, land is still out of favor.

Educational sessions highlighted the global strengths of the United States and our resurgence going forward. There was a lot of discussion of discounted note sales as one specialized way to get high returns and control of assets. However, this being a relationship business with lenders means that only a relative few will be able to succeed in this tightly controlled area. In addition, many wide held beliefs were dispelled. For instance, a commercial real estate meltdown is overblown as is the fear of runaway inflation. Extremely detailed presentaions were made to support these positions.

All educational sessions were of a particularly high level. The venue was extremely well planned to provide the maximum amount of time for socializing with broker and developer counterparts from around the US and several other foreign countries. The SIOR conference continues to show the importance of friendships and the exchange of market knowledge that can only be found in this personal setting.  I'll provide more details in future posts.

HOW ARE THINGS LOOKING?

 

Customers always ask me, "How do things look?" Here's one way to answer.  In this roughly one square mile grid of Broadway/Rosecrans, there are about 120 buildings of decent size. I count 25 that have availability. Perhaps not the entire buildings are on the market, but enough to depict this picture.  That's about 20% of the buildings with significant availability. I'm working on a lease in Chatsworth and there is even more yellow. This is  a pretty consistent picture throughout Los Angeles.  In contrast, there have been times when there is no yellow.

On a transaction level,  Landlords need to swallow a lot of pride to make deals. Rents are substantially below what anyone ever anticipated.  Tenants are negotiating hard.  On the sale side, and this is a surprise, some prices are much higher than one would expect based on rents.  The high ceiling, good-loading gem boxes are selling and mostly to Buyers who can take advantage of the cheap dollar. Older manufacturing buildings, like those found here, have not shared in the price recovery to nearly the same degree.

While activity is perking up slightly, it's spotty and unsteady.  In my case, I get a small run going and all of a sudden it's cold again. Likewise,  my broker friends may make a big deal, but then the spigot turns off.  Fund activity and build-to-suits are the source of considerable focus, but getting inside those deals are challenging.  Finally, there are some great land pieces all across Los Angeles, but it is still the most risky of all categories.

Overall, the picture is very uneven but as we move towards the rest of the year I expect to see less yellow on the map, and hopefully, more green in our pocket.