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Hitting Pay Dirt

Tim Regan is not afraid of spec development. He is vice president at Starwood CPG Operations LLC of Newport Beach, the firm set to break ground this fall on the first phase of the 650,000-square-foot Gateway V development in Santa Clarita – one of three major projects coming to the area. Gateway V will be part of the existing 8.5-million-square-foot Valencia Commerce Center, and will ultimately deliver four industrial buildings. What’s more, the Starwood project is just one of the new industrial projects coming to Santa Clarita over the next year. Sterling Gateway, a 70-acre project tucked into some rolling hills in the northwest area of the valley, not far from Val Verde, is supposed to break ground in the next few months. The project could add up to about 1.3 million square feet of industrial space at build-out and is being developed by a subsidiary of Catellus Development of Oakland. And then there’s Needham Ranch, the largest project, set on 145 acres not far from Newhall. The development by Gate King Properties LLC of Palo Alto should break ground early next year and could reach about 4.2 million square feet at build-out. Regan thinks the market is ripe for all this new industrial stock, and unlike some other developers, he isn’t waiting on any build-to-suit buyers or pre-lease tenants. He is building on spec. “There’s just nothing available out here,” Regan said. “These buildings will get absorbed very, very quickly. And in the San Fernando Valley, it’s all Class B and C properties that are functionally obsolete.” It comes as the Santa Clarita Valley has blossomed over the last several decades from neighborhoods of single-family home tracts into a growing light industrial center. In particular, it has a strong presence in aerospace and medical device manufacturing, companies that migrated north years ago when prices were dirt cheap. Notable companies include MannKind Corp., which recently received FDA approval for its inhalable insulin product; lab services firm Quest Diagnostics Inc., and Aerospace Dynamics International, which manufactures structural frame pieces, and wing and fuselage panels for aircraft. And with the Los Angeles County industrial market one of the tightest in the nation – stemming from its large port complex and Pacific Rim trade – companies are always on the lookout for good deals and new product. The majority of the industrial stock in the San Fernando Valley was built some 30 or 40 years ago, while Santa Clarita’s product is often less than 20 years old and there is still plenty of room to build more. That dynamic can be seen in the industrial vacancy rates, which stood at 2.3 percent overall in L.A. County in the second quarter, compared to 5.8 percent in Santa Clarita, according to the L.A. office of Colliers International. The low vacancy rates also affect average asking rates, which in Santa Clarita sharply rose 10 cents to 53 cents a square foot during the second quarter but are still lower than other county markets. Only the Antelope Valley offers cheaper rent. Still, John Erickson, senior vice president at the Valencia office of Colliers International, said it isn’t time to start celebrating all the ground-breakings. He is waiting to see actual construction. “It will take a lot of time for all these projects to actually get going,” he said. “The demand isn’t strong enough to push for new development today, so they’ll probably build-to-suit. The market will continue to inch forward, as will the prices. It’s not happening as quickly as we hoped, but it’s happening.” Project dimensions With the first two buildings of the Gateway V project set to measure 255,000 square feet and 105,000 square feet respectively, Regan is looking at manufacturers of different sized companies to fill the space. His company is already in talks with a local firm about expanding its presence into the first of Gateway V’s buildings, which will be the largest. That building will be state-of-the-art, with 30-foot -high ceilings, ESFR (Early Suppression, Fast Response) ceiling mounted sprinklers to provide a higher level of fire protection; and generous parking that amounts to two spaces for every 1,000 square feet of development. Regan said Gateway V has already gone through most of the grading process, and he expects to break ground on the first two buildings of the four building project by September. The other two buildings, which measure 89,000 square feet and 61,000 square feet, are expected to break ground next year, around the time the first two will be completed. The developer declined to disclose costs of the 38-acre development. Regan thinks his project has a key advantage over the other two large developments set to break ground: timing. “We’re confident that we’re ahead of the curve and we’ll be the first to market. If you’re a real estate director, are you going to take a gamble on a project that hasn’t started or come to us?” said Regan, who is open to leasing or selling the buildings. The large Needham Ranch project is the only one within Santa Clarita city limits; Sterling Gateway and Gateway V are in unincorporated L.A. County. With about 145 acres of buildable land and entitlements good for about 4.2 million square feet of development, it could take years for the Needham Ranch project to reach build-out. Stephen Cassani, principal with developer Gate King Properties, said that’s just fine with him. “We’ve got a lot of flexibility on this thing,” he said. “We have the ability to combine lots too, so we can be reactive to market demands at the time of the development. We’re interested in build-to-suit all the way up to 700,000 square feet.” That flexibility, and the location, is what Cassani hopes will separate Needham Ranch. Unlike most of the industrial product in the Santa Clarita Valley, including both Sterling Gateway and Gateway V, Needham Ranch is much closer to the residential and retail hubs, near where the 5 and 14 freeways meet. In fact, Needham Ranch is directly on the other side of the freeway from Walt Disney Co.’s Golden Oak Ranch property, which the city is hoping will help attract some more entertainment companies into the area. The L.A. County Board of Supervisors gave its approval in August for Disney to change the zoning of 44 acres on its 800-acre property to build about a dozen soundstages. “The folks that think of Santa Clarita as just a residential community are mistaken,” said Jason Crawford, economic development manger with the city. “As we expect more growth, especially from entertainment, it’s very needed for these developments to move forward.” Needham Ranch could be built out in as many as six phases, with Cassani expecting the first product to break ground early next year. That first phase could include up to 1 million square feet of flex, industrial and retail space. It will range from a 16,000-square-foot flex space, which an entertainment user may find attractive, to an entire 225,000-square-foot building that an owner-user may want. Cassani said the firm is in talks with a number of potential build-to-suit tenants, but declined to offer any specifics. “We’re not looking at any spec development,” Cassani said. “We will build as the market demands, but there’s still a lot of work to do.” That work includes everything from land grading to building roads to access the various structures and even the often overlooked tasks of installing sanitary sewer and utilities. Cassani declined to state the costs associated with the project. Valley attraction The project that is actually expected to break ground first is Sterling Gateway, not far from Val Verde and adjacent to the Valencia Commerce Center. Catellus, which did not return calls or emails seeking comment, is involved in some of the largest projects in the nation. They include the Pacific Commons, an 840-acre master planned mixed-use development in Fremont, and Serrano in El Dorado Hills, a 3,500-acre residential golf course and master-planned community near Sacramento. The first phase of Sterling Gateway, being developed by subsidiary Catellus Valencia LLC, could include three buildings totaling about 400,000 square feet, according to the non-profit Santa Clarita Economic Development Corp. Holly Schroeder, chief executive of the group, said the Sterling Gateway project has not announced any leases for the first phase, suggesting the development may actually be on spec, though she was not sure. Of course the city is eager to see the coming development, which will boost property tax revenue. “It’s not just that, it’s really about the jobs,” Crawford said. “We’re thinking long-term. We’re looking decades out at what a good community should be. A business park like Needham Ranch, which will have thousands of well-paid employees, also drives the need for other business.” And the new construction is impacting how landlords already active in the market are thinking about the future. Dale Donohoe is the president of Intertex Cos., a construction firm headquartered in Valencia that has developed more than 1 million square feet of commercial space in the Santa Clarita Valley, including Valencia Center I and Discovery Gateway Spectrum. His firm’s portfolio contains about 300,000 square feet of Santa Clarita Valley space, including some industrial. Donohoe said the new construction has prompted his company to look at some acquisitions in the near future, both in existing industrial product and buildable land. “All this construction is going to be a good thing,” he said. “The more we can build upon the market’s reputation – it’s good for everyone. The more we expand, the more attractive we are.” Indeed, Schroeder said all the developments help her group achieve its main function – business attraction and retention. “It helps us a lot with businesses to say we’ve got these new buildings and well-designed business parks,” she said. “These three projects give us a few years worth of supply, which is very good. But we still see significant growth ahead.” As for Cassani and his Needham Ranch industrial project, he sees construction as just the next step for Santa Clarita. “We’re obviously bullish on the Santa Clarita Valley and we like to see other developers active in the market,’ he said. “The San Fernando Valley is maxed out land-wise and much of the industrial product is obsolete. Moving north is the next obvious step.”

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