Yesterday, manufacturing was key. Today, it is logistics. Retrofitting industrial buildings can keep the goods moving to market.
Entertainment and tourism may be southern California’s high-profile industries, but Los Angeles County is ranked as the number-one manufacturing center in the United States, according to a recent report from the Los Angeles County Economic Development Corporation Kyser Center for Economic Research. With the rise of global trade and the combined strength of the ports of Los Angeles and Long Beach, the third-largest port complex in the world, the region is one of the busiest distribution centers as well. In the South Bay market, where a number of industrial parks are no more than 30 minutes from the port, close to the region’s vast network of freeways and the Alameda Corridor freight-rail expressway connecting the ports to the transcontinental railroads just east of L.A.’s downtown, logistics is outpacing aerospace and other manufacturing as one of the leading occupiers of industrial property.
| Part of the original Watson Land The truck court has been expanded to |
As recently as 18 months ago, much of the regional distribution activity was focused on huge, new warehouses, many as large as 1 million to 2 million square feet (93,000 to 186,000 sq m), located much farther from the ports in the Inland Empire. As the recession slowed consumers down, demand shifted to locations that allow goods to be moved more quickly, not warehoused as surplus inventory. “Velocity is more important today,” says Martin Coyne, a 25-year veteran in the industrial real estate market working independently from San Francisco. “When goods arrive from Asia, retailers want them moving, not sitting in a warehouse, which means the functionality of the space is key.”
However, most of the industrial property in the prime South Bay locations was built to accommodate yesterday’s market. “The heyday of the aerospace and related manufacturing was 30 years ago,” notes Eric Ruehle, investment contractor for the Los Angeles office of Chicago-based CenterPoint Properties, a firm that develops, owns, and manages industrial real estate nationally. “Much of what is in the market needs to be renovated to meet the new demands.” Lance Ryan, vice president of marketing and leasing at Watson Land in Carson, California, one of the oldest and largest developers and managers of industrial properties in southern California, concurs. The industrial landscape “is like sedimentary rock laid horizontally, with buildings dating from the 1960s to current construction stretched all across the market,” he says.
Manufacturing facilities of an earlier era were designed to house a substantially larger number of the employees, requiring adequate office and manufacturing space as well as sufficient employee parking. In logistics operations, the truck is the critical component. “Truck turns per day are a measure of viability,” notes Ruehle. Trucks that haul containers of cargo and other big rigs need more space to execute those turns.
“It’s now about optimizing the entire site,” says Coyne. “Truck court space is as important as the warehouse itself. In addition, paved court space and enough of it—logistics tenants need room to park trucks and sometimes containers on the site.” To expedite loading and unloading, facilities need dock-high doors—elevated four feet (1.2 m) above the truck court surface—and as many doors as the building can accommodate.
The shift in function translates to less building and more usable open space on the site. “The dramatic change in distribution, demanding a quicker turn of goods, is pushing efficiency to meet the needs of today’s users. Oftentimes, footprints need to be reduced in order to provide adequate [space for] trucking,” says Mark Harryman, president of the Unire Real Estate Group, a commercial asset service company based in Brea, California. “Recycling these buildings means taking out up to 20 percent of the square footage in return for a potential 40 percent increase in rent.”
Such radical renovations make sense only when there is substantial upside and the increasingly competitive market for warehousing close to the ports is driving activity. “As the balance sheets of corporate America are getting stronger and companies that can lease or buy are trading up to Class A properties, the Class B and C buildings have to be rehabilitated to compete,” notes Ruehle.
“What’s making it work now,” says Harryman, “is the spread in rents between Class A and Class B buildings. Before, it didn’t make sense. But when rents come down, there’s a flight to quality. Tenants are looking for efficiencies of space that will help them stay competitive.”
| The original Building 114 A major renovation for aviation parts efficient workspace and a clear identity. |
“It’s a tale of two markets,” says Ryan. “With the recovery from the recession, top-tier companies are looking for location, quality, and functionality. Other buildings can’t compete.” In response, Watson maintains an active rehabilitation program for existing properties in its industrial centers. With a focus on functionality and aesthetics, the firm is not only expanding truck yards and adding dock-high doors, but also introducing sustainable elements such as clerestory windows and skylights to bring in daylight, upgrading building systems, and updating the facades, interior offices, and landscaping with high-quality, contemporary design.
“Value-add investors are watching Class A availability tightening and see opportunities to reposition Class B properties,” Ruehle notes. “With many five-year leases, signed at the height of the market in 2006 to 2007, coming due, the market is going to be very competitive.” Los Angeles–based Marcus & Millichap‘s Industrial Market Mid-year 2011 Report confirms this observation with the following: “Industrial property sales in Los Angeles are once again on the rise as deal-seeking investors, owner-users, and institutions are stepping up acquisitions in light of encouraging economic trends and favorable financing terms.”
While demand from logistics companies is the dominant force reshaping L.A.’s industrial landscape, other companies are taking advantage of the market to create optimal facilities for their businesses as well. For example, Unical Aviation Inc., a fast-growing aircraft parts company, recently expanded operations into a repositioned warehouse in the City of Industry, an industrial suburb along the eastern segment of the Alameda Corridor. “When we looked for a new home for the company, we did not find any new properties that were right for us. New buildings of sufficient size were located much further east than our employee base,” says Andrew Ko, director of technical services for Unical. “By renovating the facility, we were able to create a workspace that reflects our own ‘Unical Aviation’ style, functions well, and has room for growth.”
The transformation of the nondescript warehouse into an inviting and highly efficient new headquarters included the introduction of architectural elements to improve function and create a sense of identity and visibility. Unical received the support of both the City of Industry and Los Angeles County in making the move, and this summer the Industry Manufacturers Council in the City of Industry presented Unical with the 2011 City Beautification Award, as part of a program honoring companies that have renovated existing facilities in the town’s industrial parks.
While the economic drivers that have made Los Angeles a leading industrial center continue to evolve, the region has a number of advantages, including proximity to the ports and the intermodal transit system. But the region’s advantages also include almost 930 million square feet (86.4 million sq m) of industrial real estate (in rentable building area, according to CBRE’s second-quarter 2011 Industrial Market Report)—as well as the developers, owners, architects, and engineers who are continually reconfiguring and revitalizing these properties to keep local businesses competitive in an increasingly global marketplace.
