Unable to find warehouse space in the San Fernando Valley, Darwin Lau considered moving his fast-growing business from Van Nuys to Ontario – but he would have lost his entire workforce and most of his customers as a result. Lau’s 40 employees had refused to relocate, even though Ontario’s industrial real estate market would have saved Lau Enterprises Inc. a lot of money. Effectively, the move would have shut down the framed art wholesaler for two months, putting his relationships with national retailers at risk. “I would’ve had to retrain, and would’ve had to cut off service to clients because I ship to them every week,” Lau said. “It wasn’t worth it.” Industrial space in the Valley has dried up as the postrecession economy has gained steam. It has reached the point where it’s no longer simply a matter of price – often space just isn’t available, period. The shortage threatens to push companies, such as Lau Enterprises, out of the Valley, and presents a big obstacle to growing local businesses to bring new jobs to the region. Lau ended up settling for a warehouse in North Hills that he said is less than ideal. “I’m working with a lot of different clients, and some are getting nosed out – they are either staying in places they don’t like or having to take spaces of less than optimum use,” said Matt Ehrlich, senior associate with NAI Capital Co. in Encino, who brokered the Lau Enterprises deal. “You have to pay asking rates and take as is. It’s a lessor’s market. They’re definitely holding the cards now and it’s a simple case of supply and demand.” Competitive landscape With industrial vacancy at only 0.8 percent in the Valley, according to NAI Capital, competition is getting fierce. Brokers attribute the space race to a stronger economy, in which consumers are buying again and enabling distributors and e-commerce businesses to expand and outgrow existing locations. When they look for larger accommodations to lease, they must compete with budding industries, such as solar panel installers and marijuana growers. Even traditional businesses that used to rent in retail centers are taking warehouse space as retail rents rise. “Thirty years ago, these buildings were occupied only by big manufacturers and aerospace,” Ehrlich said. “New emerging industries are partly responsible in the competition for trade manufacturing space, and solar would be a good example. Solar and fitness – these are two industries that were either not around 10 years ago, or as in the case of fitness businesses, they were more in retail space rather than industrial.” When it comes to buying industrial buildings, investors are eager for deals of any size, and that’s driving up the sale price or keeping it at asking price, said Jeff Puffer, senior vice president of Delphi Business Properties Inc. in Van Nuys. He said for buildings from 1,000 square feet to 100,000 square feet, the demand is there and is even greater for larger spaces. For most of the buildings he’s listed recently, several buyers are offering to pay the asking price and just as many are offering more. “The last time this happened was the last market run-up of 2007,” he said. “It’s a stronger economy; there are historically low debt costs for buyers so financing is relatively inexpensive based on historic interest rates, and I think there’s a fear of inflation driving investors to either refinance or purchase a new or additional facility.” It’s taking about three times as long for tenants to find new locations compared with six to 12 months ago, Puffer said. For example, a four-building industrial park in Van Nuys that he helped broker sold in January for $8.8 million, or $600,000 more than the asking price. The leased spaces ranged from 1,000 square feet to 4,000 square feet and there were about 20 to 30 tenants. This was the first time it was on the market, Puffer said, and it brought in multiple all-cash offers in the first two weeks after being listed. The buyer waived his rights to do property inspections, and investigated only for environmental conditions and title issues. “They were buying it as is, with all faults and conditions,” Puffer said. “The buyer we selected (Rex Investment) was so motivated and wanted the property so bad that he basically waived (almost) all his rights.” Martin Agnew, vice president of investments with Marcus & Millichap Inc. in Calabasas, said the most desirable space for investors he’s working with is buildings between 2,000 square feet and 5,000 square feet. Prices for those have increased to the mid-$200 a square-foot range, compared with roughly $125 a square foot about five years ago, he said. Competition for these buildings is from business owners in Hollywood, on the Westside and in surrounding areas – including film production companies as well as marijuana growers and dispensaries – who want less-expensive Valley buildings after getting priced out of their previous locations, Agnew said. “As long as you have parking, you can jam almost anything into industrial spaces,” he added. Stay or go? Darwin Lau, who signed a lease for 30,000 square feet in a North Hills warehouse that has some issues rather than move to Ontario, is far from alone. Many business owners have had to make do with less than ideal situations. Pods Enterprises, a moving container company, leased 91,000 square feet in a Van Nuys building even though it came with extra office space the company didn’t need, and therefore possibly higher rent, Puffer said. In addition, a Burbank company that builds stages inside industrial buildings for production companies was forced to lease 35,000 square feet as far away as Pacoima – an area beyond its customer base – because it couldn’t find space any closer, he added. Ghostlight of San Fernando, which provides stunt vehicles for movies, may relocate to Georgia after having searched for a larger facility in the Valley for about a year, Delphi’s Puffer said. There, the owner could get a 50,000-square-foot building on five acres, along with other perks and incentives offered to the company if it moves. AGF Media Services also had to settle for a location in Canoga Park, farther than it had hoped for from its clients in Beverly Hills and Santa Monica. The company, which rents out and sets up audiovisual equipment and staging materials for presentations in hotels and conference rooms, had to move after selling its building in Van Nuys, said AGF’s president and owner, Jeff Baker. Now, the company has to pay its hourly employees for the longer drives back and forth between the new location and clients, he added. “When we put (our building) on the market (in July and August), our broker told us there were 100 properties available; and when we closed (in late February), there were three,” he said. “The challenges we face are our transportation costs have gone up considerably and so have our labor costs. We’re making the best of it.” Finally, industrial property is increasingly being converted to retail and residential use, said Kenn Phillips, chief executive of the Valley Economic Alliance, a business recruitment and retention organization in Sherman Oaks. That will present an economic problem in the near future, he added. “If you don’t safeguard the industrial space, it will turn over to residential or retail and you’ll never get that property back for manufacturing,” Phillips said. “Now we have jobs that pay a lot less than manufacturing and some vacancies – but it’s not going to flip back to manufacturing. That’s the biggest problem we have.”
