[co-author: Chris Jackson]
Let’s face it, industrial and commercial spaces are very expensive to own or rent. There is simply not enough space to meet the needs of people, businesses and industries that need direct access to offices and warehouses in a local environment. Certainly, we can find places to operate production and storage facilities outside the city. We can operate the logistics from an office outside the city. But we have to provide for the needs of customers who have businesses they run in downtown or urban environments, along with providing for the needs of the end consumer. NAI Capital CEO Chris Jackson, and Allen Matkins partner, Jonathan Shardlow, share their perspective on current market trends and how they are shaping California’s industrial development, as part of the Allen Matkins/UCLA Anderson Survey of Commercial Real Estate in California in Summer 2022.
Property Value: Practical vs Realistic
It is 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 increase and the available space decreases. It is an essential lesson in the economics of supply and demand. Just like residential properties, location is everything. Every business wants the best and most practical space possible. Such a situation puts a lot of competition for the best sites for any given business. Competing bids for real estate benefit the seller, whether it is a developer, a land owner, or an investment group.
General concepts of industrial real estate
Whether a company decides to rent or buy a property, it needs space to run its business. In today’s world, companies usually need office space and warehouses. Additionally, businesses may require production space, storage space for tools and equipment, company and employee vehicle parking lots, or storefront display areas. The closer these areas are to potential customers, employees, and other businesses, the more space is desired. Unfortunately, such areas are difficult to find, at best, and often unaffordable due to stiff competition. Especially when it comes to premium properties available in California and the Los Angeles area, companies have to find creative solutions and find out-of-town properties that suit their purposes.
The nuances of the California real estate market
Of course, we can always point out anecdotal exceptions, but, as a rule, in Los Angeles and other cities in California, there is simply no place left for construction. Although in some cases the building can be demolished to make way for new construction, this 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 projected needs. For example, if we decide that we need 50,000 square feet of warehouse space to meet our current needs and projected growth over the next decade, is there a way to get just 30,000 square feet? Perhaps there are creative storage solutions that allow a smaller amount of footprint to be used more efficiently. Otherwise, renting or purchasing additional off-site storage may be an option. Logistically, such a solution can be cumbersome but is usually feasible.
The second option is to leave the city and look at how the company operates when it is based in a rural area. Production-based companies may have to plan for long wait times and high prices to receive supplies and plan deadlines by understanding how it will take longer to deliver finished goods than if they are located directly in the city they serve. These problems are not as dramatic for larger companies operating on a national or global scale as they may be for smaller local companies, but each faces an additional problem. We cannot expect employees to commute three hours in each direction to perform their job functions, but there may not be an adequate supply of qualified personnel within a reasonable driving distance.
wait. There is a third option.
The third option offers a little compromise. The location may not be ideal but can be feasible in most circumstances. This is for the purchase of land in the suburbs or areas designated as future suburbs that have not yet been developed. Such a solution brings the company close enough to its ideal location to operate profitably and yet solves the cost problem that prime real estate can be. Most contractors and investment groups want to sell the land they have purchased at residential prices for industrial value and accept an immediate profit rather than waiting for the 10 to 20 years it may take to see a return on investment through the construction and sale of condominiums.
Considerations for suburban development
Although the third option is a great solution that solves many problems that companies face in today’s world, it can be difficult to implement successfully. It will require legal advice and an experienced advisor to use this plan. The area would have to be redistricted to accommodate industrial use. There are more factors to such a process than the average person tends to understand. It depends on how the company intends to operate and what is already in the area, which may be disrupted by the introduction of commercial use space into the area. There will be local ordinances and neighborhood requirements that must be followed along with city, county and state laws.
This third option, however, is becoming the best solution for many companies. Again, it requires an attorney who specializes in real estate. Internal or external attorneys who serve other business needs may not fully understand the nuances of real estate law, because it is a system in itself. There is a process for obtaining approval for reorganization and obtaining permission to build a commercial facility in an area previously designated for residential use. The process can be slightly different based on a specific area and requires a professional who understands how to navigate such a process by providing and presenting business plans in a way that is acceptable to anyone and everyone affected by introducing a new business to the area.
The summary is relatively simple to summarize. The value of California real estate, is, is, and will always rise over time. It’s a great investment when properly planned. Whether you’re buying property for personal or commercial use or buying it to hold and resell, we’re almost guaranteed to make money every time, assuming we avoid simple hobbyist mistakes. The demand for industrial space will not decrease anytime in the near future. California will remain a hot spot for industrial and commercial businesses. Real estate will always have its name, which means “real value” in the sense that it has a definite value that will remain regardless of any other factors that temporarily affect the economy.