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The Growing Demand for Small-Box Industrial in SoCal

Carrie Rossenfeld Industrial

The holiday season is a game-changer for industrial users as consumers’ expectations for delivery ramp up. According to a representative of CapRock Partners, logistical efficiency and a positive customer experience are top of mind in anticipation of increased package volumes. Customers now expect two- and same-day as standard delivery times, and for retailers, having access to nearby warehouses can become vital to a successful last-mile logistics strategy. Enter the demand for small-box warehouses.

Typically less than 200,000 square feet in size in a nearby infill location, and surrounded by housing with substantial purchasing power, small-box warehouses are now the linchpin in the e-commerce ecosystem, according to the rep.

CapRock has acquired, developed, or has in its pipeline nearly 11 million square feet of industrial real estate to date, totaling more than $1.5 billion. The rep says the firm is bullish on its last-mile logistics strategy and is currently building more than 4 million square feet of class-A industrial product in the Inland Empire in 2018, including, as SoCal Real Estate recently reported, Colony Commerce Center, an industrial development in Ontario, California, comprising 1.3 million square feet of space.

But the company is also familiar with industrial spaces of all sizes. We spoke with Jonathan Pharris, co-founder and president of CapRock Partners, a private industrial investment and development firm, about the importance of small-box industrial warehouses and how they are essential to last-mile delivery.

Jonathan Pharris | Courtesy a representative of CapRock Partners

SoCal Real EstateWhat trends are you noticing in the size of industrial spaces SoCal users are seeking?
Pharris:
Demand for industrial space throughout the Western United States is robust across all size spectrums. We own industrial assets in California, Arizona, and Nevada, from multi-tenant spaces with units as small as 2,500 square feet within a larger business park to 1.2 million-square-foot single-tenant big-box buildings. We are seeing more demand for space today across our portfolio than any other time since the great financial crisis. Companies of all sizes are confident in the strength of the economy as they are experiencing business growth.

How do small-box industrial warehouses fit into the mix of what users want?

We define small-box buildings as free-standing, single-tenant industrial buildings (as opposed to multi-tenant, mid-bay distribution buildings or big-box buildings) that range in size from 30,000 square feet to 200,000 square feet. In today’s market, these buildings are of increasing value in urban areas, surrounded by a strong employment base and neighborhoods with significant purchasing power. Small-box warehouses can serve a variety of potential users: last-mile logistics, general warehousing and distribution, manufacturing, e-commerce fulfillment operations, corporate headquarters for an entrepreneur, and third-party logistics (3PLs), among others. To meet today’s demand, the design of small-box buildings needs to be flexible to accommodate the range of users.

Small-box buildings are more likely to be sold to an owner-user or a 1031 exchange buyer than other industrial warehouse products. The total purchase price of small-box industrial buildings is typically more affordable compared to big-box buildings, and many times — specifically in the Western United States — the end tenants tend to be entrepreneurs who want to own their own facility rather than rent.

When are these warehouses most often needed?

This economic cycle can be characterized by a recovery in major corporations with access to capital and by companies that are capitalizing on the e-commerce evolution. As we progress through the cycle, small-box buildings are primarily occupied by companies experiencing growth, and by last-mile logistics facilities close to urban centers. These two factors — a healthy economy with access to capital for entrepreneurial companies and demand for same-day delivery — are in large part driving demand for small-box buildings.

What else should our readers know about this topic?

The users that occupy small-box buildings range across the credit spectrum, and developers and their capital partners should be prepared for non-credit tenants. That being said, we are pleasantly surprised by the financial strength of many of the companies that are interested in leasing our small-box buildings and have even been approached by Fortune 500-caliber companies.

CapRock Partners will be under construction on more than 4 million square feet in the next few months, including nearly 1 million square feet of small-box industrial warehouse space currently under construction.