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Thursday, May 19, 2022

How One Developer Found In-Fill Opportunity

With little land available in the San Fernando Valley for new industrial buildings and logistics tenants hungry for new space, even 15 acres of unstable soil looked good to developer Xebec Realty Partners. The Seal Beach company bought the empty lot in Sun Valley despite the fact that a former gravel mining operation left behind deep pockets of silt, making it unbuildable. The city of Los Angeles agreed, and had labeled the property as having “undocumented fill,” which meant buildings constructed there faced possible foundation issues. But Xebec gambled on the site’s potential because the 5 freeway and dense population centers are minutes away, and it matched with the developer’s new focus on building large warehouses for e-commerce tenants. Being in locations with quick access to consumers soon after product orders are placed – a distribution strategy called “last-mile” delivery – is crucial for e-commerce businesses and they increasingly need distribution facilities near major highways in mass markets. Two years and $58 million since the purchase, the once-shaky ground has been stabilized with a dense underground network of reinforcing rebar and concrete piles and an ultra-thick concrete and steel slab. Above, a 255,500-square-foot warehouse – the larger of two buildings planned for the site – is slowly materializing with a tenant already in place. Gretchen Kendrick, Xebec’s chief operating officer, said the company has been hunting aggressively for land that fits its new focus – the infill-last-mile market – and so bought the property despite the significant risks. “Xebec is just starting that strategy because the sites are hard to find,” Kendrick said. “E-commerce has changed the landscape for retail, but also for the industrial market.” Solid ground? The developer faced multiple potential roadblocks with the purchase of 11063 Pendleton St., so it partnered with Barings Real Estate Advisers, the global asset management firm Barings’ investment advisory arm, to share the financial costs. First, the builder needed to stabilize the soil under what would eventually be a total 352,500 square feet of logistics space named the Sun Valley Business Center. The project is scheduled for completion this summer. Xebec hired Morris-Shea Bridge Co. of Irondale, Ala. to drill a vast network of concrete and rebar vertical piles into the ground. The piles, 1 to 2 feet in diameter, form foundational support for sites such as chemical, manufacturing and power plants, steel mills, high-rise buildings and refineries. The piles can penetrate deep – about half of the 1,650 piles at Xebec’s site are 110 feet underground. They are also expensive – some of the piles cost $4,500 each, while the average was about $3,000. The drilling process is also quieter than traditional pile drivers because Morris-Shea uses a special rotating auger that screws the piles down into the underlying stable soil, and more effective because the auger laterally displaces the dirt as it compresses around the drill. The piles contain freshly poured concrete reinforced with rebar and extra steel, which are left behind once the tool is pulled up and out of the soil. Xebec’s property work took about four months. The company also firmed up the two buildings’ underlying pad using a concrete and rebar slab 18 inches thick, compared to typical 8-inch thick pads, said Greg Hook, head of construction for Xebec’s internal contractor, Xebec Building Co. The foundational work added $30 a square foot to the cost of the building, Hook and Kendrick said. “What’s so unique about this is the added cost of the piles and the 18 inches of rebar,” Kendrick said. “That is not normal.” Even preparing for the foundational work was risky and costly. Xebec had to hire a geotechnical engineer and structural engineer to supply details of how many piles to dig, how far underground to go and where to drill, which opened the door for possible mistakes, Hook said. “There was a question if we guessed rightly on the necessary depth,” Hook explained. “We made only eight (test) borings and didn’t know what we were going to find.” But the alternatives would have brought their own problems. Using a typical pile driver to install piles into the ground would have been extremely noisy with lots of vibrations coming off the equipment. With several companies surrounding the site, Kendrick said that method “would have been a disaster.” A second option – grading the entire site down to more stable soil – would have taken twice as long, Kendrick added, and would have required a second plot of land nearly the same size to store the soil – a luxury the company didn’t have. Fortunately, Morris-Shea was well-known to L.A. city officials because the company has worked in Marina del Rey, Kendrick said. That familiarity helped Xebec’s project receive approval, she added. Higher lease rates John DeGrinis, senior executive vice president with brokerage Colliers International in Irvine, negotiated the lease on behalf of the building’s tenant, OnTrac, a regional overnight package delivery service based in Chandler, Ariz. With OnTrac, Xebec got the type of tenant it targeted, with customers including Amazon.com Inc. in Seattle and N.Y.-based meal-kit delivery service Blue Apron Inc., DeGrinis said. The distributor leased the 255,500-square-foot building in September. OnTrac focuses on the quick delivery times that e-commerce demands for customers in California, Arizona, Nevada, Oregon, Washington, Utah, Colorado and Idaho. It leases 60,000 square feet in Oxnard and the same amount elsewhere in Sun Valley, which it will probably give up once the larger facility becomes operational, DeGrinis said. “They were in pain at that location and needed more space,” DeGrinis said. “We looked at tons of alternatives over the last two years in anticipation of solving that problem. They knew there were very little choices to solve and satisfy their requirements.” OnTrac considered alternatives in Valencia and Santa Clarita and even as far north as Tejon Ranch, DeGrinis said, but they were too far from the Valley, which is in the middle of OnTrac’s market. Xebec’s building is considered state-of-the-art for e-commerce, with 32-foot clear height ceilings and 35 cross dock truck-loading doors on opposite sides of the building to allow fast and efficient transfer of packages coming in from bulk warehouses and going out on delivery vans. The facility also has 195 feet between the dock doors to the property’s edge so that semi-tractor trailers can easily get in and out of the property. “That’s extremely rare out here – you’ll (normally) see less than 100 feet of maneuvering room,” DeGrinis said. OnTrac is paying close to the 89 cents a square foot that Xebec wanted, he added. By comparison, the average industrial lease in the east San Fernando Valley had a rate of 76 cents in the most recent quarter, according to Colliers’ data. DeGrinis said 10-year-old buildings are getting close to 80 cents a square foot in this ultra-tight market. The second building in the Sun Valley Business Center will have 97,000 square feet and is not leased yet. Xebec is looking for 96 cents a square foot, DeGrinis said. Kendrick said many developers wouldn’t have risked buying the property, but it has penciled out financially for Xebec. “The market was telling us where rental rates were going,” she said.

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