Industrial Continues to Thrive; Space and Location are Challenges

Let's face it, industrial and commercial space is expensive to own or rent. There simply isn't enough square footage to meet the needs of the people, companies, and industries that need direct access to offices and warehouses in a local environment. Sure, we can find places to run production and storage facilities outside of town. We can run logistics from an office outside of the city. But we have to provide for the needs of clients who do have businesses they run in downtown or urban environments, along with providing for the needs of the end consumer. CEO of NAI Capital, Chris Jackson, and Allen Matkins partner, Jonathan Shardlow, shared their perspective on current market trends and how they are shaping California industrial development, as part of the Summer 2022 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.

Real Estate Value: Practical vs. Realistic

It's well known that commercial real estate has always been, in most cases, more valuable than residential space. The gap widens further as the need for industrial space continues to grow and available space decreases. It's a basic lesson in supply and demand economics. Just like residential real estate, location is everything. Every business wants the best, most practical space they can afford. Such a situation puts a lot of competition on the best locations for any particular business. Competing bids for property benefits the seller, whether as a developer, landowner, or investment group.

General Concepts of Industrial Real Estate

Whether a company determines to rent or buy property, they need room to operate their business. In today's world, businesses typically need office space and warehouse space. Additionally, companies may require production space, storage space for tools and equipment, parking for both company vehicles and employee cars, or storefront display areas. The closer these areas are to potential clients, employees, and other businesses, the more desirable the space. Unfortunately, such areas are difficult to find, at best, and often not affordable due to stiff competition. Especially when it comes to the premium real estate available in California and the Los Angeles area, companies have to find creative solutions and find real estate outside of the city that can suit their purposes.

Nuances of the California Real Estate Market

Of course, we can always point out anecdotal exceptions, but as a general rule, in Los Angeles and other Californian cities, there simply is nowhere left to build. Although, in some cases, a building can be torn down to make room for new construction, such a process can be cost-prohibitive. This leaves two options.

The first is to adapt an existing space as needed and adapt the company's needs to accommodate the space they have to use. This solution depends on the company's current and anticipated needs. For example, if we've determined we need 50,000 square feet of warehouse space for our current needs and expected growth over the next decade, is there a way to get by with only 30,000 square feet? Perhaps there are creative storage solutions that allow the lower amount of footprint to be used more effectively. Otherwise, renting or buying additional offsite storage space might be an option. Logistically such a solution may be cumbersome but is usually doable.

The second option is to leave the city and look into how the business can function when headquartered in a rural area. Production-based companies may have to plan for long waits and heightened prices to receive supplies and plan for deadlines by understanding how delivering finished goods will take more time than if they were located directly in the city they serve. These issues aren't as dramatic for larger companies that function on a national or global scale as they may be for smaller local businesses, but they each face an additional problem. We can't expect employees to commute three hours each way to perform their job functions, but there may not be an adequate supply of qualified employees within a reasonable driving distance.

Wait. There Is a Third Option.

The third option offers a bit of a compromise. The location may not be ideal but can be workable in most circumstances. That's to buy land in the suburbs or areas designated as future suburbs which have yet to be developed. Such a solution puts the business close enough to its ideal location to function profitably yet solves the problem of how expensive prime real estate can be. Most contractors and investment groups are willing to sell land they bought at residential prices for industrial value and accept an immediate profit rather than waiting the 10–20 years it might take to see a return on investment through building and selling residential units.

Considerations for Suburban Development

Although the third option is a great solution that solves many problems businesses face in today's world, it can be tricky to execute successfully. It will require experienced legal advice and counsel to utilize such a plan. The area will have to be rezoned to accommodate industrial use. There are more factors to such a process than the layman tends to understand. It depends on how the company intends to operate and what already exists in the area, which may be disrupted by the introduction of commercial use space to the area. There will be local ordinances and neighborhood requirements to follow along with city, county, and state laws.

This third option is, however, becoming what many companies are finding to be the best solution. Again, it requires a lawyer who specializes in real estate. In-house or external lawyers who provide for other business needs may not fully understand the nuances of real estate law, as it is a discipline unto itself. There is a process to gaining approval for rezoning and receiving permission to build a commercial establishment in an area previously zoned for residential use. The process can be a little different based on the specific area and requires a specialist who understands how to navigate such a process by providing and presenting business plans in an acceptable way to anyone and everyone affected by the introduction of a new commercial business to the area.

The Bottom Line

The bottom line is relatively simple to summarize. Real estate value in California is, always has, and always will rise over time. It's a great investment when properly planned. Whether buying property for personal or business use or buying it to hold and resell, we're almost guaranteed to make money every time, assuming we avoid simple amateurish mistakes. The demand for industrial space isn't going down anytime in the near future. California will remain a hotspot for industrial and commercial business. Real estate is always going to define its name, which means "real value" in the sense that it has a defined worth that will remain regardless of whatever other factors temporarily affect the economy.