CBRE recently reported that momentum for additional construction of U.S. warehouses is not likely to wane because the vast majority of the country’s warehouse stock is decades old and ill-suited for the needs of e-commerce. In Southern California, the Inland Empire is flush with new state-of-the-art facilities ideal for e-commerce distribution, yet the Los Angeles area as well as some parts of Orange County are dominated by old warehouses that were originally designed for a manufacturing economy.
Kurt Strasmann, CBRE’s executive managing director of Orange County and Inland Empire operations and Southern California functional industrial & logistics-market leader, CBRE, says, “There is opportunity but it’s a challenging one. E-commerce and distribution companies require different functional needs than that of a manufacturer.”
We spoke with Strasmann and how the different areas of SoCal are dealing with old warehouse stock and what is being done to combat this problem.
SoCal Real Estate: How are the different areas of SoCal dealing with old warehouse stock?
Strasmann: You have to segment SoCal in two groups: Orange County and L.A. is one area, and the Inland Empire is the second area. IE is a newer market, so the bulk of the buildings there are pretty good, and that’s evolving. That market has had about 500 million square feet of warehouse space, and 100 million of that has come on line in the last five years only. There are good buildings there, for the most part. Designs are evolving as business models have evolved. We’ve gone from a manufacturing-based inventory stock to a business model where the demand is for warehousing.
The infill areas are different than the Inland Empire. Many of these buildings were built 40 or 50 years ago, and what was in vogue then was different than it is now.
What are the challenges owners and developers face in updating old inventory and bring it up to current standards?
There are challenges to both new development and redevelopment. It’s not like land is available in these different areas that you can develop — this is few and far between. Most of it is already developed, and to reposition — or more adequately said, to tear down and rebuild — is challenging: first, something has to be available for sale; then, you can tear it down and rebuild. But then, you are dealing with a lot of regulation in California. This is all exacerbated by low vacancy. For the size of the market, there are very few new developments.
You can do some things, but it’s hard. The number-one criteria everyone would love to have is increased ceiling clearance to have warehouses as high as you can. You need maximum clear height to maximize cubic square footage and adequate truck turning distances — many warehouses need 185 feet, and sometimes the property doesn’t lay out that way. Sometimes the sprinkler systems need to be upgraded. There’s a calculation of how much water spreads over a certain square footage in a certain time frame, and that often needs to be updated. The higher up you go, the higher calculated the sprinkler system needs to be.
Also, to raise the roof on buildings is really expensive. You have to build structural, which has been cost prohibitive. It’s more efficient just to tear down and rebuild – this has been proven by all the developers.
Will we ever go to multistory industrial? I think we eventually will, but it’s still cost prohibitive. There are height limitations on buildings, depending on where they’re located. Prologis is first developer in the west doing multistory, and this is in Seattle and the Bay Area.
How are warehouse users adapting to the lack of state-of-the-art warehouses in this market?
Users are searching in a much broader geographical range to find the right facility. Typically, you would want to locate close to where you’re at, but due to lack of inventory, particularly in Orange County and L.A., they are looking in a much larger geographical set to find the right facility. We’re in a very unique time period, with the vacancy rate where it’s at and the economy where it’s at. There’s a finite amount of land and buildings, and when sites come up, often industrial sector competes with residential, which exacerbates the problem. So, lease and sale prices have gone up. We’re all experiencing this same issue in many markets, so we’re making do with what’s available.
The IE is a little different story — they’re adding more than 20 million square feet of industrial a year. That’s why there’s been such tremendous growth in the IE. They’re also averaging over 20 million square feet in net absorption annually, so demand has kept up with the supply being delivered. Certainly, the e-commerce factor has contributed greatly to what’s going on. There’s the double whammy of e-commerce and the fact that the general economy is diverse and broad.
What else can be done to alleviate the problem?
In the infill areas, in a perfect world, we would love to raise the roof. But the next best thing is working on the aesthetics: exterior curb appeal, hardscape, and landscaping to make a property look nice. Modernizing the interior office space is also very important. Then, from an efficiency standpoint, improving the efficiency of loading to increase capacity or run a logistics model with more truck doors that allows more inventory flow in the building can be done. Lastly, the sprinkler calculation is the big one. It’s important to allow the storage of different types of products in warehouses. It’s a really hard and challenging problem, but the best solution is if something comes up for sale, tearing down and rebuilding.