Industrial Continues To Thrive, But Space And Location Are Challenges – Real Estate


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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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