Are New Industrial Buildings too Expensive? Look Beneath Them for the Answer.

Image Attribution: www.actionbusinesstips.com

Vacant land - needed for construction of manufacturing and warehouse structures - hardly exists in our area. Why, you may ask? Years of robust demand have encouraged developers to snap up every inch to construct new buildings.

Your average vacant industrial parcel - if you could find it - weighs in at over $65 per square foot or $2,831,000 an acre! Wow. To add some context - when I entered the commercial real estate fray during Reagan’s administration - entire buildings could be purchased for cheaper.

Within recent years, the majority of new industrial development locally, has begun with a campus of aging improvements. Take the Boeing campus in Anaheim, the Beckman location in Fullerton, or the ITT Cannon site in Santa Ana. Yep. All were former homes to massive amounts of aerospace, integrated circuit, or medical device manufacturing employment. Over time - as market demand shifted and the ways in which these plants were used - obsolescence occurred. Opportunities for a re-tool of the parcels emerged and shiny new developments were born.

Rarely in Orange County do we find an industrial building with extra land. As discussed in a previous column, a greater price for a building will be paid by a developer or an occupant if extra land exists. One such example occurred this year along the La Palma corridor in Anaheim as a developer paid top dollar for an existing Fry’s Electronic’s store with - you guessed it - extra land.

However, I must define "extra". We use the term excess and surplus interchangeably - even though we shouldn't - to describe extra land. You see, if the extra land doesn't serve the use contained, yet cannot be separated and sold, the land is actually surplus land. In this instance, an occupant who had a large outside storage need would ante up. If the surplus could house additional building square footage - voila! Fry’s offered both! Slated for a “last mile” facility where rows of Prime vans can be parked - yet with the ability to expand square footage if needed - this was a win win aquisition. However, in the absence of these two circumstances, no increase - because fronting cash for future advantage is costly. Conversely, if the extra land was excess - I can separate it and sell it - eureka!

A developer will analyze a land purchase based upon the density of new buildings he can achieve. Simply, if he can get one square foot of improved industrial structures to every two square feet of land - he’s golden. Also known as coverage ratio - 50% is very good for a project of manufacturing or warehouse buildings. Once coverage is determined - a model can be created which suggests the economic viability of the project. Said another way - can money be made from the investment required? Sadly, the answer is often no - which causes builders to consider other product types - such as apartments. Ever wonder why Jamboree south of the 405 or the area surrounding Angel Stadium is consumed with multi family structures? That’s the reason. Land is worth more under high rise residential than used as a base for a warehouse.

So, to the question. Are new industrial buildings too expensive? With 98 of every 100 occupied and very cheap money - we still have a ways to the top. Plus, with land prices, city pushback, and construction costs increasing - don’t plan on much new supply. Big demand - short supply. Sounds like even higher prices are headed our way.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.com.