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Friday, Aug 12, 2022
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Landlocked

Finding vacant space for a developer to create a ground-up warehouse, retail center or residential community has never been more challenging, according to those in the North Los Angeles commercial real estate industry.

“We’re not blessed with a lot of vacant land,”’ said Jim Markel, vice president and regional manager of Marcus & Millichap in Encino.“The under-riding theme is scarcity,” agreed John DeGrinis, a leading industrial real estate broker based at Newmark’s Calabasas office. “We don’t have green field development. Most has been redevelopment.”Take the industrial sector, for example. With a total inventory of 1 billion square feet of industrial space, L.A. County’s vacancy rate has remained below 3 percent for 36 consecutive quarters, making it the lowest industrial vacancy rate in the nation, according to Newmark Research. Tenants have already taken 97.2 percent of the 8.9 million square feet of new supply in the last 24 months.“Land is very tricky right now,” Markel said. “It’s also expensive to entitle and build. Labor and materials (costs) – that’s having a ripple effect in things coming to market.”Redevelopment optionLonnie McDermott, a real estate broker at Marcus & Millichap who specializes in land-related transactions, said ground-up development was a pretty good strategy until about 2018. Then things began to change.

In 2019, he explained, developments were getting done. However, builders were becoming more cautious“Then the pandemic hit,” McDermott said. “A lot of deals fell out of escrow because of that. People walked away from deposits. It was scary.”Soon after, development began to lag.“The slowdown primarily was cost,” McDermott said. “The land was costing more money.

(Good) labor was harder to fine. The materials were inching up. Cost became the issue.”The result is hesitancy and a stop-and-go pattern in a market that takes years to bring a development to completion.

“Going back to June of last year, we thought we were going to get started again,” McDermott said. “And then we stopped. Then began again in the fall, then stopped around the holidays.”Instead of open land, developers have concentrated on redevelopment of aging assets. For example, this month, Stream Realty Partners and joint-venture partner QuadReal Property Group will commence construction on Tapo Canyon Commerce Center, a fully entitled five-building industrial complex located at 1800 Tapo Canyon Drive in Simi Valley on land previously occupied by an office building.Covering 18 acres, the new industrial buildings will range from 25,786 square feet to 135,579 square feet and provide tenants leasing options from 19,239 square feet to the entire 344,056-square-foot campus.

DeGrinis is a leasing agent on this project, along with fellow Newmark Executive Managing Director Patrick DuRoss and Senior Managing Director Jeff Abraham. The project is anticipated to deliver to the market in fall of next year.“This site was previously utilized as a one-story office building that no longer had strong demand or utility in today’s market,” DuRoss said of Tapo Canyon Commerce Center. “Conversely, we are experiencing unprecedented levels of demand for modern industrial buildings throughout the North Los Angeles region.”Added Senior Director at Stream Scott Sowanick: “Despite acquiring the property during peak market uncertainties in the summer of 2020, our team’s forward thinking and conviction in this site’s potential for modern industrial product never wavered.”On the multifamily side, USA Properties Fund has started construction on a pair of apartment projects in Simi Valley totaling 311 units, a combination of market rate and affordable senior housing. The development is located on a 13-acre parcel that was formerly Rancho Simi Recreation and Park District’s headquarters at 1692 Sycamore Drive.The adjacent complexes, which have an overall price tag of $114 million, will provide mixed-income, multigenerational housing. The $82 million 212-apartment Landing at Arroyo will consist of a market-rate apartment community with amenities while the Vintage at Sycamore will be an affordable senior community open to residents 62 years and older. The $32 million, 99-unit Vintage complex will include a clubroom, fitness center, a computer center with wi-fi and printers, a pool, an outdoor seating area with barbecues and a pet area.But even these developments, which succeeded in repurposing property for more commercially attractive uses, face difficulties because of rises in material costs.“Development is a long process anyway so not everyone is in the same stage of development,” McDermott observed. “It’s start and stop and we’re on pause.”  On the upside, properties in the office and retail sectors are under-utilized and prime for redevelopment.“A lot of the smaller mom-and-pop (retail) centers have been devastated, so the property owners of those properties are looking at reimagining them and selling them as redevelopment opportunities,” McDermott said, especially along transient-oriented zones.Observed Marcus & Millichap’s Markel: “Multitenant retail center tenants are not paying, so there’s this rush to buy depressed properties and reuse them.”Materials shortageIn addition to the lack of available land, the rising costs of building materials, including lumber and steel, and a limited labor pool are hampering new large-scale developments.“Wood is a part of our industrial buildings but not as big a part as steel,” DeGrinis said. “Steel has gone up fourfold in the last 10 months. … Last year, before all of this scarcity, the lead time to get steel was 16 weeks in advance of building. Today, it’s north of 40 weeks.”The cost for lumber went “through the roof” with price increases of 300 to 500 percent because of COVID, McDermott said.

“When they closed the borders, they couldn’t get more lumber in from Canada,” he explained. “So costs went up. People pre-bought lumber.”Per a report at Construction Dive website earlier this year, the pandemic has wreaked havoc on the materials market. According to Daniel Pomfrett, national director of forecasting and analytics at construction cost tracking firm Cumming, in February, lumber and steel had surged as some 25 percent. Iron and steel scrap surged 50.8 percent year over year in January while softwood lumber spiked 73 percent, per the Producer Price Index.

A National Association of Home Builders study found that since the COVID-19 pandemic impacted softwood lumber prices, the price of an average single-family home increased by nearly $16,000. Supply chain disruptions of building materials, such as the delay of shipping from Asian suppliers, contributed to the shortage of lumber and steel.The rise in the cost of materials translates to more expensive buildings. According to DeGrinis, from December to May, construction costs for a typical concrete tilt-up on a 150,000 square-foot edifice has gone up 30 percent.

“We’ve always seen year-on-year costs, but this is definitely related to COVID phenomenon,” he said.

Rent hikes aheadEventually, the lack of land, materials and labor will put pressure on rents.“Everyone is reckoning with higher costs and what happens is landlords are going to ask for more rent,” DeGrinis added. “You’re going to need $1.30 to $1.40 (per square foot rent) triple net to cover this.” In the second quarter, Colliers International reported average industrial rents in the San Fernando Valley of $1.13, up from 91 cents in the previous quarter.DeGrinis added that he doesn’t foresee any event that would be bring rents down, at least in the industrial market.

“It used to be cycles are part of our economy and we’d have rises and falls, but we haven’t seen that in a while,” he said. “At this point, we’re not seeing any element to where that would happen anytime soon.”

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.
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