How to Find the Best Industrial Building Today

How to Find the Best Industrial Building Today

How to Find the Best Industrial Building Today

Map of Where Industrial Occupiers Move
Where Industrial Occupiers Move

In less than 18 months, the industrial building market has shifted from low vacancy to abundancy. There are now 215 industrial spaces, greater than 50,000 square feet, available in the Greater Los Angeles Basin. This does not include Orange County, Inland Empire, or San Fernando Valley. Only the areas you see on the map (below). About 20% is sublease space.

The best value for most tenants is second and third generation spaces. Many of these buildings built since the year 2000 have the same characteristics as brand-new buildings except for ceiling heights, although many of these 2nd Gen buildings still go to 30’.

  • 36’ high buildings came in around 2023
  • 30’ – 32’ Clear was the norm starting in 2000
  • 24’ Clear started as far back as 1975

Older buildings are equally functional as new buildings for less rent, especially if they have a low tax basis. One exception is if the tenant plans to install interior warehouse installations like mezzanines or specialty racking and automation. In these cases, latest generation buildings have an economic advantage because of height.

Some of the calculations we perform to determine functionality include:

  • Location and Distance
  • Docks per 10,000 SF
  • Building to land ratio
  • Cubic Capacity and Cost per Cube
  • Property Taxes/Expenses
  • Ceiling height
  • Sublease

To identify the better buildings, we subject all available properties through a macro analysis. This is the best way to identify differences in functionality and cost when there are a lot of choices.

Here is an example:

Let’s say you are in 100,000 square feet in the South Bay and you want to double in size. Some tenants will move completely to put everything under one roof. Other tenants will look for a satellite building as an interim step. Most South Bay companies will look locally and as far as Santa Fe Springs and Mid Counties. Some will want to go as far as IE West. What will you find?

Streamlit Demo View
Streamlit Demo View

We model the entire market on the Kleincom Industrial Building Analysis we developed on Streamlit. For this report (100,000 SF to 250,000 SF), we identify 55 choices of which 14 are subleases with terms of at least 3 years (some up to 5). For demonstration purposes, we will leave aside, the additional 80 or so buildings in Inland Empire West (Rancho Cucomonga, Ontario, Chino, and Fontana) that meet the size requirement.

Using Ceiling Height with 24’ as the minimum, we establish the following distribution. For most tenants, 30’ to 32’ is the sweet spot.

All Buildings 100K to 250K
All Buildings 100K to 250K

Buildings are dispersed over the entire Los Angeles Region.

Buildings 100k to 250K L.A. Basin
Buildings 100k to 250K L.A. Basin

The second factor to sort the choices is the Loading Dock Ratio measuring docks per 10,000 square feet to determine loading efficiency. Any dock ratio greater than 1.5 doors/10,000 square feet is considered highly efficient and closer to 2 docks/10,000 SF is superior.

Docks Per 10k SF
Docks Per 10k SF

Looking at the top results, it’s not always the newest buildings that are the best choices. You can lease 2nd or 3rd generation buildings for $1.75 to $1.95 per foot (all-in). About half of the buildings are 30’ or greater.

Results Table
Market Area Size Rate Month Clr Year Cubic Ft Dock Ratio B:L
Gardena/ Compton 300000 1.6 $480,000 26 1987 7800000 3.33 40%
Carson/Compton 300000 1.53 $459,000 25 1970 7500000 1.84 52%
Carson/Compton 285000 2.2 $627,000 32 2006 9120000 2.24 41%
Carson/Compton 250000 1.51 $377,500 25 1972 6250000 2.17 60%
MidCounties 250000 1.8 $450,000 32 2002 8000000 2.05 59%
Carson/Compton 150000 2.1 $315,000 36 2024 5400000 2.84 60%
Commerce/Vernon 150000 2.6 $390,000 36 2024 5400000 2.11 55%

For some tenant’s subleases may be the right answer because the terms are relatively short, and the financial commitment will be less. Ecommerce tenants and larger Amazon/Temu Sellers are drawn to subleases. The top subleases have exceptional loading and low property taxes. In most cases, landlords will renew when the lease expires.

Best Subleases
City SF Yr Blt HGT DH Dock Ratio Years Remaining
Carson 300000 1973 22 40 1.33 3.69
Industry 225000 1996 30 25 1.11 5.58
Torrance 200000 2000 30 30 1.50 2.69
Torrance 135000 2001 30 25 1.85 3.44
Commerce 125000 1957 22 55 4.40 5.28
Santa Fe Springs 120000 2003 30 30 2.50 3.78
La Mirada 100000 1997 30 20 2.00 2.44
Compton 100000 1981 24 15 1.50 3.02

Experienced tenants will use site plans to decide. There is a preference for a more rectangular building than a square so you can load more trucks simultaneously and divided to sub-customers if necessary. Here’s an example of two buildings of approximately the same size and asking rent. Most tenants would prefer the first building because loading exceeds 2 docks per 10,000 square feet, it has additional trailer parking, and the warehouse can be easily divided into sections while maintaining optimum functionality.

The second site plan is reasonably functional but only has 1 dock per 10,000 square feet, can only be divided in half and is less functional than the first example. For the same cost, most tenants will choose the first building.

With the high cost of land and construction costs, developers need to maximize building coverage to compete and make a profit. In other words, developers are often forced to build the largest possible building on the site while doing their best to keep the building functional. As you can see, some buildings are more functional than others.

Every tenant has different priorities, but most revolve around the same criteria of location and function. At Klein Commercial, we have 40 years of corporate real estate experience locating the best buildings for our clients. Our latest tool, the Kleincom Industrial Building Analysis, will help you make the best choice amongst all the available space on the market today.

Industrial Real Estate – Year End 2023

Industrial Real Estate – Year End 2023

Industrial Real Estate – Year End 2023

The industrial real estate cycle is pointing at Recession. It should not be a surprise because it was brought intentionally by higher interest rates in an effort to combat inflation. Based on my market experience, it’s a mild recession. Tenant activity is adequate, not robust. Rents are down after surging during the Supply Chain Chaos, but they are still above pre-covid levels. Sale prices are also down because higher interest rates require a price adjustment.

When rents are falling, landlords need to close those deals immediately. If they stall and get lost in the back-and-forth, that tenant will skip to a cheaper building.

There are overleveraged buyers who purchased at the peak when rents were their highest. The best example are outside storage yards. But almost any building that was purchased with short term or adjustable-rate finance will have to digest higher rates with some needing to add cash. Businesses, too, are facing higher interest rates. Private credit facilities have entered the void left open by the banks. These companies, who own their real estate, are motivated to sell and leaseback.

The current financial environment makes Sale Leasebacks advantageous for both buyers and sellers. In periods when it’s difficult to obtain financing, lenders will be more generous with a 10 year (or longer) lease in place. Corporate sellers and owner-occupiers, facing higher interest rates, can look to their owned real estate to raise lower cost financing in a Sale leaseback transaction.

There are generally three different types of sale leasebacks:

The first is an Absolute NNN lease with no landlord responsibility including casualty and condemnation. The tenant keeps paying rent no matter what. It has elements of a corporate bond in its reliance on the tenant’s credit. A Credit Tenant Lease is for critical manufacturing, distribution, or infrastructure for a long term lease with a rated tenant.

The second form of Sale Leaseback is used to raise cash for lower rate financing or for other financial engineering reasons. Owner users and corporates can unlock years of “unrealized” equity. There are often balance sheet advantages. Sale Leasebacks are routine with private-equity owned businesses. Pricing is closely related to the tenant’s credit rating.

US Industrial Markets marked by different colors depending on market region
US Industrial Markets

The third type of Sale-Leaseback is in name only. Because either the lease term is short, or tenant credit is weak. These deals are more fully underwritten on the real estate. Tenant term and credit is less a factor than building quality and market acceptance. Buildings in major metros that are easy to backfill are good candidates.

A good use of the sale leaseback is with growing companies. Retailers are a common example. In the manufacturing realm many companies benefiting from the Inflation Reduction and CHIP Acts are using Sale-Leaseback’s to finance their new factory building and acquisitions.

Sale leasebacks are a common tool in the CEO playbook. Located in Los Angeles, we ally with local SIOR independent, market experts from across North America and Europe to support our activities. We will respond rapidly to industrial building opportunities you may have in Los Angeles and elsewhere in the United States.

Thank you.

Los Angeles Industrial Viewpoint

Los Angeles Industrial Viewpoint

Declining Industrial Building Rents

Rents are declining from pandemic highs. The rent range for greater Los Angeles (including property taxes) is $1.00 per foot for older spaces to over $2.50 per foot for newer bulk space. More space is available in almost all size categories. Smaller spaces are rare due to the higher cost to build. One note for the South Bay. Rents are lower in The Gardena/County Strip area because of RV encampments, concerns of employee safety, and local government failure. Rents are highest in the LAX, Beach Cities, and LAX where there is high-tech manufacturing, defense and airfreight.

Property Taxes

Property Taxes have a big impact on rents. At one time, property taxes were only a few cents per square foot (psf) but with a rise in property values, it’s common to see up to $.50 psf once properties are reassessed. It can be 25% or 30% of your total rent. Due to Proposition 13, when a property is sold, taxes are re-assessed at the new value and that increase is normally passed through to tenants. Looking at the chart below, lowest taxpayers are almost always longtime property owners, families or partners. High taxes are more common because of the long investment boom since 2010.

Power

Tenants seeking heavy power, 2000 AMPs or greater, will face delays of twelve (12) months or greater because electrical switchgear and transformers are on back order. Many tenants are seeking EV chargers which increases load. In some parts of town, vandals strip vacant buildings of electrical breakers and copper wiring making the buildings inoperable. The graph below shows there is an ample supply of buildings with sufficient power. Many buildings with the most power will lack the most modern features since they date back from L.A.’s manufacturing past. Developers are installing large panels in their new buildings.

Industrial Sale Market

Higher interest rates have changed everything. Relatively high rates have restrained the long investor led boom since 2010. With many investors sidelined, owner/users have the opportunity to buy. Even at current mortgage rates, the loan payment approximates the amount you would pay for rent. Loans are prioritized for long term credit tenants and not risky investment deals. Large acquisition funds are selling their less desirable assets. Carrying paper is attractive.

 

Jim Klein, SIOR a 40-year background of industrial real estate brokerage and investment in the Los Angeles area. Our specialty is representing corporations and local landlords. While we practice in Los Angeles, we have moved many customers out of state with help from our SIOR colleagues throughout North America. Klein Commercial recently added new sales staff, IT and analytics to our brokerage service. Please consider us for your next industrial real estate deal.

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How Is Industrial Real Estate Today?

How Is Industrial Real Estate Today?

Map showing electrical symbol for buildings with increasing size based on building
Power Map of Buildings In LA County

Industrial real estate is a diverse business that includes Investment funds, developers, private/family owners, corporations, occupiers, and a mix of product types and industries. Industrial buildings are in every community and are the source of employment, production, distribution, and wealth for many. The nation’s economic health rides on the success of industrial real estate.

There are several factors that are driving deals today. Broadly, these include Interest Rate Policy, US Industrial Strategy, and Local Municipal Governance. Everyone is affected differently. For example, higher interest rates are never good for real estate, though they affect sales more than leases; sale transactions are interest rate sensitive while leasing is supply and demand based. As an experienced broker, we use detailed knowledge, market analytics, and long-standing relationships to help you in making the best decision.
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New Gardena Industrial Commentary

New Gardena Industrial Commentary


The geography of Gardena needs explanation. There is the City of Gardena proper and three times larger than the city boundary, is the Gardena Postal Zone. The larger Gardena area includes parts of Unincorporated Los Angeles County (West Rancho Dominguez), City of Los Angeles Strip, and the northwestern part of Carson. The zip code 90061 is also included in most market studies of Gardena because it squares off the uniform industrial portion of West Rancho on the north side. When someone asks me how the real estate business is in Gardena, it depends where you are located. Each municipality has its own zoning regulations and homeless policies which have a direct relationship to the individual parcel value.
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New Industrial Down Zone for West Rancho

New Industrial Down Zone for West Rancho

 

(This article has been updated with relevant links below)

Industrial property owners in the West Rancho Dominguez Planning District of Los Angeles County are facing another downzone in the Metro Area Plan. The M1 (Light Manufacturing) is being replaced by a new, more restrictive category, M.0.5 (Artistic Production and Custom Manufacturing). This zoning limitation will reduce the pool of economically feasible tenants and lower the rents property owners can charge. While most citizens of Los Angeles don’t cry over the landlord’s income, the unintended consequence will be plant relocations and job losses.
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Three Innovations for 2023

Three Innovations for 2023

ChatGPT:

I could not start the year without acknowledging the tools that are currently available at Open AI. I’ve recently created a new FAQ page with the use of ChatGPT and Dall-E 2. It must have been under the wire before Google Search created new defenses against text bots. I received one solid lead from a company looking for 30,000 square feet because of the AI-generated explanation of my services.
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Leasing Industrial Property in Los Angeles County Under the New Green Zone Ordinance

Leasing Industrial Property in Los Angeles County Under the New Green Zone Ordinance

Leasing Industrial Property in Los Angeles County Under the New Green Zone Ordinance

Green Zones

Green Zones are an entirely different way to look at zoning. It is an outgrowth of the Environmental Justice Movement that had its local origins addressing diesel exhaust at the Port Complex in San Pedro Bay. Properties are analyzed and graded based on their contribution to health disparities using the Environmental Justice Screening Method (EJSM). The EJSM is a new tool and strategy that is designed to correct unhealthy conditions by establishing new mitigation mechanisms. The County will use the EJSM for ongoing monitoring and annual reporting to the parcel level.

Depending on the EJSM score, Regional Planning offers four (4) different routes to approval. The simplest is Site Plan Review (SPR) and it is approved administratively in what we use to call, “over the counter”. The other three routes are discretionary and require formal application and Public Hearing at different levels of planning authority. Generally, the greater the health impact, the longer the approvals.
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