Category Archives: Real Estate Strategy

Winter News 2016 – Industrial Real Estate Profits

development Deal Strategy

The current cycle is being propelled by three major conditions: Space Scarcity, Capital Markets Pressure and Rent Surge. Market dynamics are still very favorable for development and will only be disrupted if demand begins to weaken. Otherwise, strong fundamentals are the prevalent condition in most major U.S. markets.

Space Scarcity is an affliction felt in urban, infill industrial markets across the United States. There is a short supply of Class-A industrial space at central locations. With high cube warehouses and superior loading being a minimum requirement for running a modern distribution business, Occupiers either need to pay up for central locations or move to the exurb where land is available. While it’s a tricky balance choosing between centrality and quality space, both Developers and Occupiers continue to push outwards for new development.

Capital Markets Pressure is exemplified by too much money chasing too few deals. In addition, finance for industrial real estate has changed. Although there is a lot of money looking for deals, the bulk of it goes to a select few. Investment conditions are excellent with historic spreads between interest rates and yields. New industrial building remains profitable with market pricing comfortably in excess of development costs. This distortion is partially caused by a regime of artificially low interest rates and Space Scarcity. In this environment, premium prices and generous loan terms are commonly obtainable for long term, credit leases. The influx of foreign capital, industry consolidation, and increasing portfolio values are all related to the competition of capital.

Rent Surge is the driving force behind good investments. Because of Space Scarcity, rents are advancing at one of its fastest clips ever, greatly exceeding inflation. Firstly, low rents made at the depth of the recession are rolling over at large increases. But Space Scarcity is the larger contributor because when there is nothing available, Landlords have unprecedented power to set new rates. While this trend has already been playing out with some frequency, there are still many pockets with room to grow.

These three conditions are driving business. Space Scarcity is causing many companies to move to the exurb for new development. Many parts of the U.S. are seeing the same thing whether it’s the Inland Empire, Central California, South Dallas, or Exit 8A off the New Jersey Turnpike, they have all become regional distribution centers attracting companies leaving the largest metros. One of my primary business goals is to show Occupiers how critically important their occupancy is to the economic success of new development. There are particular ways to structure a deal that can have outsize financial benefits. Conceptually, it’s fairly easy to understand, but very difficult to pull off because it takes skill and market knowledge. Great deals are made by leveraging the Occupier’s long term occupancy against development risk. To be able to do this anywhere in the U.S. is a special attribute.

Working with Occupiers has a beneficial spillover effect on Developers and Land Owners because they can also profit with a sophisticated Occupier-in-Tow. While building Spec will result in higher profits if the timing is right, many developers appreciate having a sure thing as long as they are being compensated for their capital, risk and expertise. The same logic applies to Land Owners. All things being equal, having the Occupier-in-Tow, substantially removes the risk of default and results in more profit for everyone.

lan develop process

Investors are delighted to have a long term lease in hand. It drives down the cost of financing and reduces cash outlays. The Occupier-in-Tow and the surety of cash flow is the important component to obtaining the best funding. Many of the best lenders will not take leasing or vacancy risk but as soon as the lease is in place, capital becomes more competitive with a sure thing. Occupiers with multiple locations have been able to receive lucrative portfolio valuations by creating a separate real estate entity based solely on their own occupancies. The business is made by connecting Occupiers with Real Estate Capital; Big Industrial is the vehicle.

Besides new development, Space Scarcity, Capital Markets Pressure, and Rent Surge have a corollary effect in infill, metro locations. For instance, in Gardena, just like many infill markets across the U.S., Rent Surge is creating profits. Firstly, leases made at the depth of the recession are starting to turn over at large increases. But Space Scarcity is the more effective influence because with nothing available, Landlords have unprecedented power to set new rates. While Rent Surge is causing many Occupiers to move, it also greatly benefits owners of centrally located property, no matter the age. This is a clear case where developers are being rewarded for refurbishing and re-leasing close-in industrial. Many of these smaller and older properties are not institutional quality but because of their locations, have considerable upside. The biggest barrier is access to capital.

Private investment groups have the most impact on infill because deal size is smaller and conventional lenders are too onerous. These developers tend to raise money the hard way – one investor at a time. The investment groups are normally led by a market insider and apply a strategy, as explained above, to infill markets. They create deals with the Occupier in hand and take risk where there are strong fundamentals. Properties with extra land or expensive tenant improvements tend to retain longer occupancies. This is how we do deals in Gardena.

In our business, we receive support from four major areas. Investments in our technology platform, called MAPP and described elsewhere, gives us superior market analytics and allows us to deal in the entire universe of Big Industrial. Our relationships with SIOR brokers, due to decades of personal contributions to the organization, gives us the generous cooperation of the best brokers in every major U.S. and International market. We recently staffed up our hiring both on a junior and senior level so we can keep up with the new business. Finally, it’s our clients that deserve the most thanks because of the confidence they give us to innovate with markets, techniques and technologies.

What can change the momentum? A slackening in demand from low growth and global weakening is the biggest threat. Interest rate increases, of course. But as things stand today, there are profits to be made because market dynamics are still dominated by Space Scarcity, Rent Surge and Capital Markets Pressure.

Notes From the 2015 SIOR Fall Conference in Chicago

space scarity cropped

Here are a few notes from the SIOR Fall Convention 2015 that was held in Chicago this past weekend, October 8-10.

National Industrial Perspectives

This session was moderated by Jim Costello from Real Capital Analytics who brought excellent research slides and five superior panelists including Roy Splansky from the sidelines. The primary emphasis was to contrast different strategies based on the type of capital being used. There was a REIT specializing in secondary markets; a buyer of NNN assets who also does joint ventures and pre-sales; a buyer of value-added industrial; and a mortgage broker.

For instance, one buyer borrows from Life Companies to finance new industrial construction with long term credit tenants in major markets. In addition if you have an investment grade and long term 20-year lease, it is possible to take cash out, in excess of replacement cost, as in a Credit Tenant Lease (CTL). In contrast, a different buyer relies on CMBS finance, now available in greater quantity, to finance older buildings in secondary locations with weaker credit. Yields are of course higher. Additionally, CMBS will lend on older product at 75% of appraised value even if the deal price is lower. The common thread shared by all buyers is they are looking for at least a small advantage that boosts returns.

Real estate portfolios were a strong topic. Cash makes large institutions nervous. Real estate is a secure yield and offers safety. Large Buyers need to deploy cash in very large chunks. They can’t do that in one-off transactions. Portfolio Sellers receive better pricing than if they sell a single LLC and can include difficult properties at the same time. In particular, Sovereign Wealth Funds have a different profile than most other investors. Sovereigns rely on low amounts of debt and very long holding periods, but they won’t purchase single properties. For others, portfolios are a strategic way to spread risk over many buildings while taking on lower credit and shorter lease terms thereby mitigating overall exposure and retaining their own high credit rating.

In this low cap rate environment, many look to build. The market is ripe for new construction because of historically low vacancies, especially in Class A space. Because of the space shortage, large users have no other option than new buildings. Speculative construction is well rewarded in most parts of the U.S. The choice these panelists face is either to pay up for for existing product or take on development risk. Normally developers are receiving 150 to 200 bps for taking on the additional risk of speculative development. Texas has a lot of product in the pipeline, whereas the Southeast has supply shortages and good demand fundamentals. Developers naturally seek out markets with strong population growth. In order to obtain financing on new construction developers need one of three things – pre-leasing, a guarantor, or equity.

In terms of finance, Moody’s Corporate B yields are a good precursor to the movement of cap rates. Recent market turmoil has caused CMBS to increase by 80 to 90 bps; Life Companies are only up by 20 to 30 bps. In terms of interest rates, Life Company spreads are 180-200 bps over 10-year treasuries for 65% leverage. CMBS spreads are 245-275 bps over 10-year swaps for 75% leverage.

There was a lot more to this session and I thank the remaining panelists, William Barry, Draper & Kramer; Don Pescara, Griffin Capital Corporation; Ryan Stoller, Venture One Real Estate and Brad Sweeney, STAG Industrial.

Technology Disruption in Commercial Real Estate (CRE)

Steve Weikal from MIT ran two sessions focusing on industry disruption from many new CRE technologies. One session began with Brandon Weber of Hightower who pointed out the commercial real estate business is rapidly institutionalizing and these acquiring entitles require new tools for reporting, transparency, metrics, analytics, and prediction. He also posted a quote from Marc Andreessen, “software is eating the world” foretelling how the real estate industry will evolve.

During the presentation, Mr. Weikal divided the technology applications into two major categories, Workplace and Workspace. Within these categories he named almost 50 applications out of hundreds more that are available. Up until this point, most of the “app economy” has been targeted at residential real estate but the sights are now drawn to commercial. There will be a lot of niches to exploit once you put together the right technologies.

While I won’t list all the products that were named, the categorization alone was enough to gain a sense of where the industry is headed. Each sub-category shows how the industry is splintering and different vendors are carving out areas to master. Under the Workplace category came Data Visualizing, Find and List, Analyze, and Manage the Process. Under the Workspace category, we looked at Workflow and Traffic, Sharing Economy, Virtual and Augmented Reality, and Big (small) Data. My personal favorites are the apps that help me do more transactions.

In a follow up program, I hope to learn how quantitative data is serving large buyers and developers to make big decisions. As in other industries, technologies like those discussed, directed to the business of commercial real estate, will have disruptive consequences to the status quo. It’s now our turn.

During the presentation, Mr. Weikal made the following additional points: There is a strong city focus with millennials looking for the urban experience for creativity and energy. If not 24 hour cities, at least ones that are open 18 hours. “Urban Burbs”, live work and reduced car ownership are parts of the new development patterns. He also reiterated more data and better transparency; analytics and decision making; and decreased transaction friction underlie many of the new technologies.

I was happy to hear that the brokerage business would not disappear like travel agents. Commercial real estate is a complicated business that benefits from experience. However, those that take advantage of new technology are the ones who will prosper.

Economic Update

The premier real estate economist, Dr. Peter Linneman, closed the conference. His first point was the troubling gap in GDP from a normal growth pattern is attributed almost completely to weak housing production. We are producing only 65% of what would be expected under historical conditions.

Consumer spending at “Brick Retail” is flat because of increasing internet sales. However if ecommerce ran under normal revenue assumptions, the price of goods would need to rise 25%-40%. How long can companies afford to pay for growth?

Other factors that weigh on the economy include average Consumer Confidence, below average Small Business sentiment, and low rents in suburban office. One surprise was that industrial construction is at the highest levels ever, and while not by itself a cautionary signal, if demand falls, we could be facing excesses. Still, the overall market continues to have very low vacancy rates.


It was an excellent conference. Many major developers and investors attend on a regular basis to get access to the finest brokers worldwide. Social activities are an important part of the conference where we can personally meet our peers and clients. Meanwhile SIOR is embarking many new initiatives and ventures so we can continue to provide relevant and effective services to our clients. Next year we will be in San Diego, London and New York City.

Looking at US Industrial with the US Cluster Mapping Project

The Cluster Mapping Project (CMP) was pioneered by Michael E Porter of Harvard University. He is just as well known for his works on Competitive Advantage.  His work is a necessary foundation for US Industry and business organizations. I reprint his Value Chain diagram below for company diagnostics, which has been repurposed to examine the competitiveness of regions. To understand the implications of location and clustering, you can read an article Professor Porter published in 1995 about the strategic location of inner cities which is just as relevant today. 

CMP moves the competitive business insights into a geographical framework. The primary mission is to make regions more competitive by harnessing their own primary activities and resources. Just as in the example of Inner Cities, the CMP has uncovered many industry clusters on a national basis that is intended to help regions understand themselves, but can also guide industrial real estate users and developers into areas of specific strength and concentration.

 It’s well worth looking at the CMP site and spending the time to understand the background concepts.  Be sure to read all the appendices because they demonstrate the different industry categories.  The CMP can lead to a very good understanding of U.S. industry that is specific and data intensive, both which will help make investing decisions.

Because the CMP has so much data available and flexibility in query and reporting, it can used for other purposes. For instance, the CMP can be used to locate deals, not in the specific sense of finding property, but to steer your effort and energy.  If the focus is on big industrial and land, the CMP shows in darker shades of blue where the most number of establishments for Distribution and Electronic Commerce occur. 


The top 15 regions with the most enterprises for distribution and ecommerce are:

Region Name Establishments 2012
New York-Newark-Jersey City, NY-NJ-PA


Los Angeles-Long Beach-Anaheim, CA


Miami-Fort Lauderdale-West Palm Beach, FL


Chicago-Naperville-Elgin, IL-IN-WI


Dallas-Fort Worth-Arlington, TX


Houston-The Woodlands-Sugar Land, TX


Atlanta-Sandy Springs-Roswell, GA


Philadelphia-Camden-Wilmington, PA-NJ-DE-MD


San Francisco-Oakland-Hayward, CA


Boston-Cambridge-Newton, MA-NH


Minneapolis-St. Paul-Bloomington, MN-WI


Seattle-Tacoma-Bellevue, WA


Detroit-Warren-Dearborn, MI


Phoenix-Mesa-Scottsdale, AZ



One can also query the industry data by comparing regions for the highest growth rates in establishments for the same category of Distribution and Ecommerce. By looking at the data in this additional way, you can also add, Riverside-San Bernardino and Las Vegas-Henderson-Paradise. From personal knowledge and not from the CMP, I would add the Columbus- Cincinnati-Northern Kentucky corridor and Memphis. Distinction also should be made between regional distribution centers, local distribution and the new breed of ecommerce. Some companies will only need to be in the regional centers with limited locations. Other companies need to be in every metropolitan area but with a smaller footprint.

The CMP breaks down clusters into sub-cluster groups by NAICS numbers. These NAICS numbers are helpful in identifying specific companies by searching industry databases by employee size and NAICS. It turns out that in the general cluster of Distribution and Ecommerce there are both growing and contracting business types. The chart below shows that several sub clusters – warehousing and storage, wholesale trade, electronic shopping, and pharmaceutical distribution – are among the most robust segments. Not only will the CMP point to regions that are growing particular industries, but it also shows which particular segments of an industry has the most growth potential. With the corresponding tools of parcel data and industry classifications, the CMP can guide both the selection of real estate and the tenants who occupy the space.



Tenant Power

Tenants have underappreciated power especially in cases of new development and investment projects.  Most tenants don’t realize their own worth because they are rarely in the market, don’t experience the development cycle and are oriented towards functionality. Conversely, lease terms and tenant credit are essential to the developer. The capital impact of the lease is well understood by the developer but is often neglected by the tenant.

Standard procedure for tenants is to get a list of properties, narrow the possibilities, and negotiate for the best serving building. The tenant rarely considers what affect their lease will have on the overall financing and eventual sale. In cases of pre-leasing, early-stage financing or build-to-suit, a tenant commitment is critical for the project moving forward.

Something as simple as a penny increase in rent, an extra year in duration, or a credit enhancement from a parent company can be substantial to the value of the property and profit to the developer. The tenant is the primary component in a greater investment strategy and the leasehold is what enables the building to be transferred or financed.

The important financial parts of the deal are debt, equity, and income. Without income, the other two parts cannot survive. This relationship is obvious when income is required by the lender before they will advance any loans. There will be no investment until a long term credit tenant is obtained. During this interim period, the tenant’s power is at its peak. While lease terms are being negotiated, the owner’s focus is on value – something more tenants need to consider.








Many tenant rep brokers are driven by rental concessions. They miss the value impact over the entire development/investment life cycle. Grinding for the best lease deal is very appropriate at times, but not at the expense of realizing a significant capital event when the development is funded. For instance, there are many examples of large tenants allying with developers to build projects around the country. This symbiotic landlord/tenant relationship is financially meaningful to both sides. Many national developers have a platform to encourage this type of partnership.

The financial calculus can be complicated. The nexus of tenant contribution, a few basis point difference of cap rate, and the value to the ultimate investor is easily overlooked.  Not only do these calculations vary over time, market conditions, and geography, but very few professionals have the expertise or capabilities to model them accurately. In other cases no advanced analysis is required. The tenant and developer strike a simple bargain to bring in a new building at market rent and any profit is split according to a formula.

There is an overemphasis on computerized lists. When there is a tenant requirement, the first step is to go to the Multiples, pull down the list, search for the best building and negotiate the deal. Not as much thought goes into making the whole deal for land, tenant, capital, and investor. If you’re a tenant, there’s no reason to reject the customary tools, but you may be surprised with the results by exercising your tenant power in the right situations.

Of course, there are many limitations to exercising this power. It’s not practical when the building is owned long term with no debt. Or if the developer already has a substantial financial partner with a working investment plan. However, if the developer doesn’t have a fixed game plan; their debt and equity mix is still in flux, a major lease commitment is required to make the deal happen. This event is common in build-to-suit and redevelopment projects. Moreover, in times of business recovery, there are more opportunities because companies are apt to spend capital on new projects and expansion. With new development comes the opportunity to weigh in with some of that tenant power.

Concentration Continues at the Top Tier of Industrial Buildings

The world of big industrial has evolved with fewer and better capitalized buyers. It’s a core group of 15 or 20 nationwide owners that know the markets, have talented principals and to the delight of most sellers, they close for all cash. In contrast, the entrepreneurial developer who played such an important development role in past buying cycles has almost completely vanished from the scene. High Net Worth Funds, REITS, Pension Plans, and the Insurance Companies dominate the ranks of primary industrial investors.  Occasionally, developer partners, seek out capital from the large institutions, but control still reverts to the same dominant group of investors.

Outside of the core investors, there are always a few Users at any given time. Many are international in origin, have large personal wealth and are only looking for one location to house their main business. Because there is no “backside” leasing in a User deal, the industry still favors investors, pricing being equal. Large corporations rarely purchase industrial space today except in cases of unique production facilities.  Non-institutional and older buildings are more wide open but financing is still a limiting factor. Further, with the scarcity of Grade A properties, the definition of institutional grade has been widening to include older and smaller buildings. In other words, competition is still limited to the top tier buyers.

This greater concentration of financial firepower is generally a good development for Sellers of large industrial. There are enough Buyers so no individual can control the market, but each one has strong  closing capabilities. During the vetting, a few bidders often rise to the top for reasons particular to their immediate investment objectives. Unlike in past times, vacant buildings or short term leases are just as desirable as property with long term tenancies.

A limited set of well qualified Buyers eases the sales process if the target buildings fit the mold.  If the real estate doesn’t have any inherent title or environmental problems and the buildings can be categorized as “modern distribution”, a Seller will be rewarded with many high quality offers. The relative simplicity of selling these larger properties is a stark contrast to the typical market transaction.

For instance, leasing is the hard work of the brokerage business. Where selling a quality building is a one-to-many relationship, leasing is one-to-one . Unless the building has some outstanding features, the broker’s work is to call one-by-one, over a long period of time.  Even with all the effort, there have been some unusual recent disappointments with buildings that should have leased but are still empty a year or more later.

The sale of older buildings has its challenges but is made easier because there is not much for sale and many smaller and mid-size company owners desire to purchase for their own personal financial reasons.  But this is a more free-wheeling part of the market than the top tier because banks play a more important role and there is a wider assortment of buyers from which to choose. Finally, older buildings often come with more design and structural problems that take time to correct.

A greater concentration of building owners is becoming the norm.  The largest investment groups have already absorbed many of the most talented players in the business mostly because funding flows to the largest organizations. As this trend continues, other categories of industrial will be absorbed by these growing entities.  Re-positioning slightly outmoded product and rolling up smaller, multi-tenant is the next wave. For now, there are still a fair number of one-off property owners but their ranks are diminishing as the bigger entities grow their experience, relationships and financial resources.


Tenants Are the New Opportunity Buyers

Tenant decision making has radically changed since the Great Recession. The combination of low interest rates and falling prices mean that mortgage payments are the same as or less than rent.  This has been a fairly rare occurrence over my 30-year career. Tenants with established histories are finding some great bargains. Even companies that may have difficulty obtaining loans and lack large down payments can team with sophisticated investors to solve many financing hurdles.
Searching for deals was once the domain of shrewd real estate operators, but uncertainty, credit and legacy problems have sidelined many of the aggressive buyers. Because of vacancy risk, the value of a tenant is the critical difference in closing deals. With the threat of slowing growth, a year vacancy can destroy a proforma. In other words tenants have become the only viable buyer for many properties.
Before the recession, industrial real estate was marketed on an efficiency ranking.  Physical attributes such as maximizing throughput with loading doors, yard depths, ceiling heights, and access was the primary criteria for many tenants.  Many developers and users strove to create the the best designed warehouses for maximum velocity. The supreme example is a cross-dock building with large side yards for container storage. Metrics included number of loading doors per square foot and cubic storage capacity. While tenants will always want functional properties, many will sacrifice the most efficient features for more affordable occupancy costs. This is a significant change wrought by the Great Recession. A lower rent for a less efficient building is an outspoken preference.

The desire to reduce costs coupled with an eye on profiting from property has changed the dialogue with tenants. Not only is there a wide selection of choices, but many tenants are starting to probe more deeply. They want to know when the property was acquired and what are the characteristics of the property owner. If the building was purchased in the boom, then price flexibility will be limited until the bank takes over. Moms and Pops tend to be better Sellers than institutions, although not necessarily true in every instance. Certain areas also tend to be better long term investments. Cities with a history of good governance and pockets of institutional ownership are a couple examples of preference.

Over the years, some very smart buyers have followed a different acquisition strategy that bears some reflection. By luck or by skill they have located their businesses in locations that receive preferential zoning entitlements. These properties could be in high density commercial corridors, near transit hubs, or for other reason are more valuable than the existing improvements merit. In a growing city like Los Angeles well located properties go through periods of excessive valuations. While we may be some time from development activity, if a user can satisfactorily occupy an older, well-located property, upside will drop in his lap.

In the first part of this year, there have been some very good purchases.  I have seen prices as low as $45.00 for older properties that need work, but mid $50’s to mid $60’s for rather decent buildings. One of the largest, but older industrial buildings in the County sold quietly this year in the mid-$40’s. This is not to say deals are easy to find, but with declining economic news, we are closer to the beginning than the end of the deal wave.

SIOR Holds Essential Conference in Toronto


SIOR held their world conference this past weekend in Toronto and for those who could not attend, here's a brief recap:

Firstly, on the way into town, signs of a bullish development cycle are evident throughout Toronto. Large building cranes and skyscraper development sites are in abundance. I was told the Canadian government regulates construction loans by monitoring pre-sales and investor/user purchases carefully and balances risk with developer capital ratios. Supposedly this type of regulation prevents my natural scepticism to the visual signs of overbuilding that has now become so obvious in the U.S.

In contrast to the skyline, the tone at the SIOR convention was a bit more dour. No one had very good news to report and many agreed that we are witnessing the worst real estate market of our lifetimes. Attendance while substantially down, was still filled with 500 or so broker/developers/owners that regards SIOR as the single best deal-making organization of its kind in the industrial and office arena. Many attendees continue to see great financial rewards directly attributed to SIOR peers they have befriended over the years. In keeping with SIOR's  international expansion goals, more than twenty countries were represented.

The programs I attended reflected the theme of dealing in a poor economy with an emphasis on defensive business practices. For instance, Michael Meyer from DLA Piper LLP led the panel, "Protecting the Tenant and Broker During Economic Turmoil". He was joined by Dennis Hearst of Cushman & Wakefield, Dennis Upshaw from the Irvine Company, and Geoff Howell, also of DLA Piper. Time was spent examining funding tenant improvements, commissions, and building operations when the Landlord runs out of money or enters foreclosure. Tenants can secure protection by negotiating offset and self-help provisions in the Lease and the Subordination and Non Disturbance Agreement with the Lender. The panel also encouraged conducting financial due diligence on the Landlord by examining title records or examining a Trepp report. Finally precise language was provided to insert into Intent Letters to speed and strengthen negotiations.

Paul Little and Mel Souza from Panattoni explained the difficulties and opportunities in their panel entitled, "Development and Construction Strategies in a Down Market". The obvious lack of financing and tenant activity has handicapped the development business. Construction costs, both in materials and labor, have fallen. In many cases land prices have negative values in relation to building prices. Fee development especially in the area of entitlements can have lasting positive consequences once user demand returns. Many municipalities are active land sellers in order to fund city services. Build-to-Suits may also be appropriate in certain circumstances and especially when the tenant has a mission to operate in a LEED certified building since so few exist on a spec basis. Overall, construction and development have diminished expectations for the time being.

In the Investment Specialty Practice Board, fellow SIORs, Mark Goode, Lance Ross, George Cibula, and Charles Klatskin analyzed the very prevalent trend of "Blend and Extend". Each played a different role highlighting the case when an existing tenant needs to reduce their rent in order to remain in the building. Landlords will often agree to a lower rent if the tenant will extend their lease term. This provides a lower occupancy cost for the tenant while giving the Landlord the ammunition to extend their loan. Variations of this concept were also reviewed. For example, obtaining a personal guarantee from the tenant on the rent reduction portion in case they don't survive the extension period.

In the ProLogis Speaker Series, Joshua Cooper Ramo addressed issues from his new book, The Age of the Unthinkable. In what was one of the best keynotes of recent memory, Ramo used examples from Foreign Policy, music mashups, and contrasting perspectives of the Chinese mind to demonstrate the new ways of thinking and acting that will be critical to the years ahead. In a different keynote address, Marci Rossell explained  the financial crisis of the past two years and offered a bit of optimism that exports will begin to lead the US economy out of recession.

Overall there were about twenty five different sessions. Program details and handouts should be available on the SIOR web site. Just as at every SIOR conference, the most important part is shared in the hallways and at the dinners. Developers offer a personal explanation for their strategies of the year to come. Fellow brokers talk with each other about ways they are surviving and even striving. Leads and views are exchanged by those who make the market. For those in the industrial and office real estate business, this and every other SIOR  conference is an essential meeting place.

Back to Local Markets



Perhaps I should qualify. Where there is action, it’s on the local level. Now that plentiful financing has been squeezed from the market, there is no more room for mega projects, program development, or new concepts. It’s back to basics and that means individual businesses and landlords dealing with their own unique decisions. Loans are available through SBA programs but limited to business expansions. Local banks that were not burned by sub-prime also have resources for conservative lending. The land side is virtually dead for development except under the most risk averse situations. There is however considerable activity in securing tenants for build-to-suit, but locating sites is still a challenge.

On the street, activity is at a crawl. Aircraft and defense is a bright spot but from much reduced levels as compared to the past. Warehouse and shipping is only moderate. Apparel and furniture have fallen from their once lofty highs. Business in other industrial sectors is just plain spotty.

So far, this is a much different recession than the past. There are not a lot of empty buildings languishing for months on end that sell for rock bottom prices. Very little exists in the way of bank owned property. And pricing is still holding up. Hopefully, it’s indicative of a second half rebound.

Outside of traditional farm brokerage, plant closings, bankruptcy sales, and Brownfield land sites are where bargains can be found. These large properties are scattered throughout the region and fall under the purview of professionals who have been monitoring these properties for years. It’s still an exciting part of the business although many potential buyers are now on the sidelines until financing sources return. Periods like this are great for developing new relationships.


Industrial rents range from a low of $.50 Gross to a high of a $1.00. This is the widest range I have seen in 25 years. The disparity is due to older buildings that are still in original hands compared to new developments that fully incorporate high building, land, tax and operating costs. Tenants fall equally on both sides of the divide. Some will work hard to make the older buildings functional. Others will work with high production volumes to afford the new developments.

On the sale side, prices run from $100 to $140 per square foot. And much higher in the new industrial condo projects. Surprisingly, prices are not correlated by age or condition, but by availability and opportunity. This condition is reflective of the volatility and financing dysfunction we are currently experiencing.

Availability is still low. Out of 1400 buildings in greater Gardena, only 55 are on the market. Transaction levels are down. Subleases are rising. Other interesting trends that skew conditions include continued high demand by Asian buyers enjoying currency exchange advantages; displaced property owners from LAUSD eminent domain proceedings armed with generous tax free trade money; and low interest rates for those with a bullet proof credit story.

While general business sentiment is muted, it’s not so obvious when looking at the numbers.




Gardena’s Japanese heritage has given us some of the best noodle shops anywhere. These are a few:

Sanuki no Sato has a great Nabeyaki.

Otafuku is famous for its hand made buckwheat soba noodle.

Kotohira also makes its delicious white udon by hand.

Marukai Market has a food court that can satisfy everyone’s different tastes, including a delicious fried ramen.

Spoon House is very eclectic that matches the best of Japanese and Italian noodles.

Next letter, Sushi….

Note picture at top is for the Avalon Distribution Center, now under construction. Sizes are 5,000 sf to 7,500 sf. Each unit has 2 docks, 24′ clr, and sprinklered. Excellent small distribution units. At Rosecrans and Avalon .

At the Edge and Stagnation of Valuation

The business of real estate is close to an end. Developing, investing and lending have all halted except for the most secure or distressed situations. An enormous swath of the industry is mothballed like an auto plant in the summer. Just like autoworkers, real estate practitioners are wondering if production will re-open. Lending divisions, development companies, land developers, and acquisition departments are closed until further notice. The biggest fallout is people we have all known for many years that are deciding what to do for the future.


There is still a small user business but most tenants are staying put until they can get a better picture of the future. Many companies on survival mode are looking for ways to finance their ongoing operations. Expansion is a distant thought. Industrial Los Angeles is suffering from the transition away from manufacturing to an industrial economy reliant on warehouse and trucking. Without consumer spending, the entire warehouse industry is bringing down industrial property as the remaining truckers seek lower marginal rents to remain profitable. Consolidations are rife as many transportation companies give up their own buildings to contract with the lowest cost 3PL.


There are a few cost saving stories as tenants migrate from expensive Westside and LAX to lower rents in better South Bay space. A similar trend occurs with companies exiting Downtown to points east or south. Instead of looking for businesses that are growing, the action is on the shrinking enterprise. Another small area of business comes from Asian companies. As American industry declines, Asian companies are expanding into beachhead opportunities they can exploit with better engineering, finance, and hard work. Hopefully, as finance fails to offer satisfactory positions to the brightest minds, we’ll see a renewal of American ingenuity into other productive fields.


In terms of the market picture, those owners who can offer cut rate pricing will do so to fill their buildings. Many rents are now below inflation adjusted numbers from the last real estate recession of the early 1990’s.  Others who are stuck with high debt service are in the unenviable position of feeding the flame in a period of declining pricing. Soon it will only make good business sense to stop paying the mortgage and attempt a bank workout. On average, asking rents vs. asking sale prices are wildly out of whack. 


Valuation Stagnation:


A common thread talking to brokers is they have no idea how to price property. Sellers are still holding on to the old hope of selling in a market of increasing comps. While these Sellers realize that dream is over, they still benchmark to a User world where rents are not as meaningful as appreciation.  Buyers are looking at pricing from the bottom. They use an income approach assuming the worst will happen. This means a 10% cap on declining rents with large reserves for leasing, T.I.’s, commissions, and vacancies. The difference is almost a gap of 50% and this explains why there are no deals.


Unfortunately for brokers, velocity suffers and the lack of transaction volume is exacerbated by the banking mess. While many buyers are salivating over foreclosures to come, bankers are willing to roll over problem loans to avoid taking the hit. As long as there are minimal cash flows, government loans at 0% can help banks play the short term rollover game. Suspension of “mark to market” accounting rules is another reason why non-performing loans are not being recognized.  With many developers on the hook with personal guarantees they have no choice but to play ball and send all the rents and sale proceeds to the bank to reduce their outstanding balance. Another government backstop helps the privately financed bank mergers. As long as the US is willing to guarantee the majority of losses, the new breed of bankers can focus on generating deposits while letting their “bad bank” colleagues engage in the dark-side of real estate workouts.


We will see plenty of capitulation on an individual scale. But with all the federal dollars, guarantees, and negotiated sale prices being offered to the most desperate institutions, we’ve created zombie lenders who have no motivation to foreclose and bargain out their properties. However this condition also prevents the lending of fresh money because the underwriting standards banks are using for new loans is the complete opposite they use for their existing, defaulting borrowers. Until we reach a cathartic moment like a GM bankruptcy for the commercial real estate business, there will be no discernible level to promote transactions. We will all be limping along with short term vision.




In the competition for industrial real estate investments, more institutionally backed buyers are dabbling with infill land, but have not yet found the formula for success. Infill sites are considered non-traditional investments because they take more effort to understand and come with substantial risk. Large buyers can not make as big an investment in infill as when they purchase a portfolio of buildings. For this reason, and until institutions learn how to roll up these non-core properties, there is still a great opportunity for smaller entrepreneurial buyers to distinguish themselves as experts in the field.

Once, only builder/developers sought these parcels for immediate speculative development. Now, with the escalation of construction costs, spec development is generally unaffordable. Land buyers are toying with new strategies that include build-to-suit, land-banking, zone changing, and other exotic plays. One industrial REIT uses “pre-sales” to obtain finished building prices with no more than an open escrow and a site plan. Another company controls many key industrial sites throughout downtown that are on the edge of densification and growth. One developer has a lucrative niche by delivering custom buildings at ever higher prices to Asian users. Some simply scour the region for any sites where they can achieve lucrative up-zoning entitlements or develop for users they have in tow, like markets, drugstores and big box merchants. While each one of these strategies can be successful on their own, there is not enough of these opportunities to build an institutional-sized business.

However, infill land is still for professional investors. It takes experience to analyze alternatives. Significantly more money is required because lenders want cash flow to cover the loan. Delays can mean land will not rent for long periods of time. There are often zone changes, public hearings, at-risk deposits and other entitlement challenges to achieve results. Most non-professionals lack the skills and hiring professional talent will eat up profits. The complexity and uncertainty of land limits the competition from “trade” buyers and “mom and pops”. There is also considerable “on-thejob” learning as nuances become clear about use, traffic counts and densities, only after the deal is underway. The surprising thing is that even the most seasoned real estate investors are amazed at the multiple returns that can be achieved or how big the losses can be in the land game.

Land is a versatile and fluid investment from the time it is purchased and even through the life of the holding period. Landowners will see a myriad of options because until improvements are constructed, there are always new possibilities. Land leases, flips, different development scenarios, and unexpected uses are a few of the alternatives that will arise. If land can be successfully held and managed over a long period of time, landowners will receive high rates of annual return with appreciation amounts that greatly exceed the purchases of buildings. It is one area of the business where outsized returns are available for skilled professionals.