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Healthy industrial market vacancy rates spur return of spec development

From an absorption standpoint, I don't know of any market that hasn't had a rise in occupancy of at least two to five points within the last 18 months," remarks Trammell Crow executive vice president George Lippe.

Van Power, president of Dallas-based Arledge/Power Real Estate Group, a tenant representation firm, says many markets are less than 10% vacant and it is difficult to find the type of space he is seeking.

This is the way the industrial market looks today, as brokers and developers applaud the most quoted explanation - "the vastly improving economy."

The 1995 Comparative Statistics of Industrial and Office Real Estate Markets, a report from the Society of Industrial and Office Realtors[R] (SIOR), supports this theory and predicts continued strength in 1995. "Of the 127 individual industrial property markets studied nationwide in this year's report, 35 markets posted occupancies at 95%. Seventy-four markets showed occupancies of 90% or better, while only four markets showed numbers less than 80%. The CBD and suburban markets tightened significantly. The suburbs experienced the more dramatic improvement by dropping to a 7.8% vacancy rate, while the central cities recorded single-digit vacancies for the first time since 1990, at 9.4%."

In some markets, the vacancy rate is almost astounding. Markets like Dallas and El Paso, for example, are far less than 10%. John Aldrich, SIOR, president of Colliers Baldwin Inc. in Dallas, reports the industrial occupancy rate at 94%. Robert Keller of James A. Keller Realtors in El Paso says that their vacancy rate is 2% with a total industrial inventory of 36 million sq. ft. Many other cities, like Atlanta, are coming in with the same sort of statistics.

The answer to this void is very simple - speculative building is now occurring in a large number of markets and there are several major players in this scenario.

One of the most active and, in the words of some brokers, aggressive is Security Capital Industrial Trust (SCI), a REIT based in Denver. It is not only buying large blocks of industrial space, but building a number of spec industrial buildings in several markets where the demand is greatest.

According to published information, "the industrial real estate on which SCI focuses is typically used for storage, packaging, assembly, distribution and light manufacturing of consumer and industrial products. SCI divides industrial properties into three categories: bulk distribution, light industrial and service center. SCI's objective is to focus its acquisition and industrial park development activities primarily on generic bulk distribution facilities. Light industrial buildings, which cater to smaller distribution and service tenants, will also be selectively acquired and developed in certain markets."

From a list of those properties, SCI is most active in the South and Southwest. Among its Southern targets are Atlanta; Birmingham, Ala.; Charlotte, N.C.; Chattanooga, Tenn.; Tampa and Orlando, Fla. Southwest activities are centered in Albuquerque, N.M.; Denver; Austin, Dallas, El Paso, Fort Worth, Houston and San Antonio, Texas; Las Vegas; Oklahoma City and Tulsa, Okla.; and Phoenix. In the West, it has portfolios in Salt Lake City; San Francisco; Reno, Nev.; Portland, Ore.; and Seattle. It also has properties in Kansas City and Indianapolis.

Its total portfolio, including properties under development, is 27,998,359 sq. ft. which, at this time, is 93.33% occupied. Total expenditures for this portfolio is quoted at $808,831,408.

SCI reports it has industrial properties operating or under development in 34 metropolitan areas, totaling 42.1 million sq. ft. Its year-end report states that it is "the largest publicly held owner and operator of industrial properties in the United States."

However, SCI, though possibly the largest in scope, is not the only developer that is seeing the need for spec space.

Atlanta-based Industrial Developments International is also in the picture. According to their president and CEO, Greg Gregory, IDI is not only building spec product in several sections of Atlanta - ranging from 90,000 to 250,000 sq. ft. - but also constructing spec industrial space in Chicago, Cincinnati, Dallas, Indianapolis, Los Angeles, Memphis, Tenn., and Phoenix.

"We are just finishing a 250,000 sq. ft. building which was already leased by the time we broke ground," he says. "We have also broken ground for another 250,000 sq. ft. building in Northeast Atlanta and will start on a. 160,000 sq. ft. building soon.

Among other developers in the spec picture are Opus North in Chicago and Opus

"We have a 300,000 sq. ft. building under construction in Carol Stream (a suburb of Chicago)," says Jim Nygaard, CEO of Opus North, "and we expect it to be leased by the time this article appears." He also states that Opus is building a 60,000 sq. ft. spec building in Milwaukee and another 187,000 sq. ft. building in Bolingbrook, Ill.

"We are continuing our build-to-suit developments with new buildings of 65,000 to 250,000 sq. ft. for individual users," Nygaard says.

"Spec building is the trend of the future because it is more profitable for the developer," says Tom Roberts, president of Opus Southwest. "Our 150,000 sq. ft. building in Tempe (Ariz.) was 35% leased when it was completed and we expect it to be 100% leased within the next two months."

Another spec Opus Southwest building of 210,000 sq. ft. is being completed in Ontario, Calif., "and we have another 27 acres under option there," he says.

The build-to-suit scope for Opus Southwest includes both a 161,000 sq. ft. distribution and manufacturing facility in Tucson, Ariz. (a re-labeling plant for goods going into Mexico), to a 180,000 sq. ft. facility in Roseville, Calif., for Hewlett Packard and a 160,000 sq. ft. building for ADVO Inc. in Newark, Calif.

"We're seeing build-to-suit activity increasing as more companies are coming to the Southwest," says Roberts, citing the industrial vacancy rate at 10%. "In addition, we are seeing spec product coming on line and we believe that it will be a very active part of overall development over the next two to three years. In Phoenix alone, over 1 million sq. ft. of space will be built in 1995."

MEPC America is another player in the spec arena. David Gruber, president, says some of MEPC's target markets are Chicago, Dallas, Los Angeles, Minneapolis and Washington, D.C. "We are seeing a strong demand and plan certainly to be building in Dallas and Minneapolis - some spec and some build to suit - this year. In fact, we might be involved in as much as 3 million sq. ft. of construction in 1995."

Tom Pearson, SIOR, senior vice president/principal of The Fults Cos. * Oncor International, Dallas, sees a large amount of activity in northwest Dallas County. He says approximately 2.9 million sq. ft. is under development in this area as companies want to be near the Alliance Airport. In the Great Southwest and CentrePort areas, Pearson sees a 60% reduction in vacant space.

In discussing spec buildings in the Dallas area, MEPC regional vice president/industrial Ab Atkins, says, "We have more than 600,000 sq. ft. under construction right now in the Metroplex (Dallas and Fort Worth, Texas) and have another I million sq. ft. planned."

Among the areas in which Atkins says spec buildings were either under construction or planned are CentrePort and Great Southwest between Dallas and Fort Worth. Other areas are Garland, where they have one 118,000 sq. ft. building under construction and are planning two more, and Coppell, the northwest Dallas County city which is immediately adjacent to D/FW Airport. "We are extremely interested in Coppell and are planning to build 600,000 sq. ft. of speculative space there," says Atkins.

"We have three buildings on the drawing board for Coppell in the 100,000 to 400,000 sq. ft. range and will be going after major suppliers to lease the buildings for distribution space. The proximity of the second largest airport in terms of passengers and freight in the country has been a major factor in our decision," Atkins concludes.

Coppell recently has been spotlighted by the construction of large distribution and light manufacturing facilities by MJDesigns and Lone Star Plywood and Door. The Freeport designation of part of the industrial land within the city has drawn wide interest within the development community, according to Coppell Mayor Tom Morton.

Another of the spec developers in the Dallas area, Marc Myers Co., is starting work on a 289,500 sq. ft. distribution facility in Coppell. This will mean almost 1 million sq. ft. of new spec space in the northwest Dallas County city.

Smaller, more localized developers are also into the spec development picture.

"Other developers who have committed to spec projects are Marc Myers, Jackson-Shaw, JSC Realty and Trammell Crow Co.," says John Aldrich, SIOR, president of Colliers Baldwin Inc. "Reports reaching me say that there is going to be some 5.5 million sq. ft. of spec space built in the Dallas area in 1995 - at least that is what is planned and there may be more." SCI is also contributing to the spec space being constructed in the Dallas market.

Whether it is spec space, build-to-suit or just a great increase in activity, reports from around the country verify the fact that industrial real estate is "at the top of the list" for real estate deals at this time. Eastern U.S. exhibits increased activity

In the eastern United States, reports from New York, the Washington-Baltimore area and Atlanta point out the increased industrial activity.

"The industrial market is pretty strong, particularly in the build-to-suit market," reports Brian Sekel, managing director of commercial and industrial leasing in New York and New Jersey for Purchase, N.Y.-based National Realty & Development. "There has been a lot of absorption, and demand has caught up with availability."

While there is not much space to choose from, says Sekel, he has never seen a time where there was not enough space. Because the nature of the industrial market is such that companies can operate as long as they have access to good vehicles of distribution, and because of limited space selection, Sekel sees the industrial sphere widening as tenants operate across larger distances.

Roger Muessig, general manager of development and rentals in the regional development department of The Port Authority of New York and New Jersey, reports that their properties are seeing increased activity, both in New York City and in New Jersey.

"The Elizabeth, N.J., site is in a unique location between the container ports and the New Jersey Turnpike, giving tenants access to any type of transportation and is also in an urban enterprise zone, as well as in Foreign Trade Zone #49," he says.

Big box retailers are moving into some of the industrial buildings. He cites a major Swedish-owned home center company to whom 21 acres of land were sold in the industrial development. Their largest store will be 265,000 sq. ft. and will be used for both warehousing and retail.

In New York City, Muessig cites that they have eight buildings on 12 city blocks for a total of 522,000 sq. ft. "It is rough area, but we constructed a suburban-style industrial park and it is doing well." At this point, they have only four acres left and they are building 141,000 sq. ft. for Ralston Purina and another 65,000 sq. ft. for the manufacturers of Upper Deck Baseball Cards. "Clay Park Labs, the country's largest manufacturer of drug store brand drugs, has a 265,000 sq. ft. building in the park," Muessig says.

Another New York City developer and owner of industrial space, John Ritter, a partner in Sholom & Zuckerbrot, reports that their one-story manufacturing facilities are only 9% vacant and the multi-story buildings are now 16% vacant. He also reports rents on these spaces as $4 per sq. ft. triple net for the one-story buildings and $3.50 triple net for the multi-story buildings.

"We have 20 million sq. ft. in the outer boroughs of New York and we are seeing business expansion, especially in the small to midsize manufacturing segment," Ritter comments. "The New York region is dramatically improving because of political factors. We are seeing Republicans take over and we see that as an advantage.

"What we are going to see is substantial cutbacks in taxes and government spending and that will allow the outflow of jobs out of New York to reverse itself and our job growth will be on an equal footing with the rest of the country," Ritter says.

He also mentions the retailers taking over old industrial space and says that was the biggest factor affecting Brooklyn, the Bronx and Queens. "K mart and other big box users want eight to 10 acres, but they can't find it, so they take a large industrial building and refit it for retail use."

Further south in the Washington-Baltimore area, Tom Burns, senior vice president/director of the Washington-Baltimore Corridor office of Carey Winston, reports that rents on distribution space in that area had increased 20% in the last year. "This is a large distribution area serving areas to both the north and the south and are in great demand at this time.

"This area seems to be very interesting to investors," Burns says. "Security Capital just purchased an 800,000 sq. ft. portfolio for $37 million and there are other REITs and investors shopping today," says Burns.

"Some industrial parks that were created 16 to 20 years ago are maintaining their value," he continues. "They provide off-street parking, green areas and other amenities that would be hard to duplicate. There also are some single and multiple tenant buildings that were developed `on spec' years ago that are still functional and are interesting both buyers and tenants."

Atlanta is one Southeastern city that is continuing to see marked improvement in the industrial sector.

As Gregory of IDI says, "The Atlanta market is alive and well and very healthy!"

Dawn Eyester, director of leasing for Prentiss Properties, is even more positive. "Prentiss owns about 1 million sq. ft. of industrial space in Atlanta and it is 100% leased, she says, describing Atlanta as "a solid market."

"We are seeing people coming into Atlanta and a number of expansions within the ranks of the companies already here," she says. "Another thing we are seeing now is tenants taking space before they need it, sometimes six months ahead of time. They are doing five- to seven-year leases and there are almost no concessions involved in the transactions," she continues.

Eyester cites a St. Paul Properties park on Beaver Ruin Road at I-85 to demonstrate the way the Atlanta industrial market has changed. "In 1985, you could not get a prospective tenant to even go see the property at Beaver Ruin Business Center. Today, there is 71 million sq. ft. of industrial space on the site." She also says that in 1990, she had one property that was 40% leased when she took it over. It took 18 months to get it to 90%, with lease rates at $2.90 per sq. ft. "The latest lease in that type of space was for $4.25 per sq. ft. in February 1995.

"In the northeast market where most of the speculative building is happening buildings with 20% finish out are leasing for $4.74 to $5.25 per sq. ft. The average size deal is about 15,000 sq. ft.," she concludes.

Midwest shows turnaround in demand

Chicago is a good Midwestern example of what is happening in the industrial market.

"During the last 12 months, we have seen a real turnaround in demand, primarily in the industrial market," says John Moysey, executive vice president of Amli Realty Co. "Rates are firming and beginning to creep up and the several million square feet of speculative space we see coming on line is experiencing a good response. There is good preleasing of space and, I believe, a great deal of the demand is driven by big box users consolidating their operations.

"The majority of the industrial users are looking for more state-of-the-art technology in their distribution facilities and the old buildings just don't accommodate them, although some old buildings are being retrofitted," he continues. "Sales rates are firming and moving upward. We have seen an overall average rise of at least 5% just within the past six to 12 months."

In Dallas, occupancy of industrial space is up to 94%, according to John Aldrich. "For that reason, there is 5.5 million sq. ft. on the boards to be built this year and next. Everything that was built last year is now leased.

"What we are seeing is informed, educated lenders coming into the market today," he continues. "And therefore large amounts of equity are being put into projects and what is happening is that many of these projects are sold even before completion."

Speaking of the "hot" Dallas area markets, Aldrich notes that west and northwest were the best - between I-35E and I-35W. This includes Farmers Branch, a most viable industrial area which Trammell Crow started developing years ago, Coppell, the Freeport area of Irving and Alliance Airport.

"Dallas and Fort Worth", he says, "will continue to be a landlord's market. Expansions by telecommunications and high-tech companies will keep flex space tight, particularly in the 50,000+ sq. ft. range.

Aldrich predicts that by the end of 1995 there will be 277.5 million sq. ft. of industrial inventory in the Dallas market in multitenant buildings of over 20,000 sq. ft.

"1995 will be a settling down and leveling out year. Pent up demand from eight years' stagnation fueled by a tremendous resurgence in the industrial market clearly fixed occupancies above 90% in 1994. Occupancies in all types of industrial space will approach a solid 95% in 1995," Aldrich concludes.

"The biggest trend in the Dallas industrial market is a consolidation of companies and an increase in the space requirements of those companies," says Pearson of The Fults Cos. "The deal sizes have increased to at least 150,000 sq. ft. or more.

"Another major trend reveals a merger of the Dallas and Fort Worth markets into one major industrial market," he continues. "Particularly because of the geographic location and the Alliance Airport, the Dallas/Fort Worth area is becoming recognized in the global economy as a major industrial hub."

"There was about 2.5 million sq. ft. of new industrial building in Houston in 1994," says Bruce Fincher, principal of Midway Equities Inc.

"We are seeing tenants coming out of multitenant buildings into their own, often enlarged spaces and e are seeing some regenerated space coming on the market. This is particularly true in investment-grade industrial product," he continues.

"From an investment standpoint, bulk distribution buildings are the rage," Fincher says. "Go build it and someone will buy it and many institutional buyers are looking very closely at the Houston area. This is a capital-driven market at this time."

South of Houston near the Houston Ship Channel, USX Realty is still marketing Cedar Crossing, its 1,500-acre industrial park that is served by rail, highway and barge transportation.

Joe Antoline, general manager/Southwest for USX Realty, reports that they have recently leased all the available space in the huge steel manufacturing facility - formerly a US Steel manufacturing plant. "We are looking forward to making more space available in the 1.1 million sq. ft. building in the next 12 to 18 months," he says.

One of the first facilities to buy property at Cedar Crossing, Seapack, a firm that packages overseas shipments, has increased its space to 315,000 sq. ft. and has bought another 30 acres on which to erect another 315,000 sq. ft. building.

"We are directly across the Houston Ship Channel from the Barbour's Cut container terminal, the largest of its kind on the Gulf of Mexico, and with our barge facilities, we are seeing increased interest by companies interested in locating on our land and using those facilities," Antoline says.

Austin is another market where industrial absorption has led to a great deal of speculative building, as shown by the high-tech industries that are moving to the Texas State Capitol City in droves.

"Although Austin has not traditionally been a distribution market," explains CB Commercial industrial broker Roger Duck, "some of the high-tech firm's suppliers are coming in and demanding distribution-type buildings, but with a difference. They want 24 to 26 ft. clear and loading docks, but they also want 30% to 60% office finish. We choose to call it flex space.

"The tenants for these smaller buildings are usually suppliers to our high-tech firms, such as Advanced Micro Systems, Motorola and Applied Materials," he continues. "I know of one case where a supplier told me he had to be ready to deliver product to the high-tech firms 24 hours a day, seven days a week. That's why they have to be here in Austin."

The city of Austin has grown from a quiet, medium-sized city housing the Texas state offices and The University of Texas to a bustling center of the high-tech industry.

Recently, when it was announced that the Air Force was going to close Bergstrom Air Force Base just south of Austin, the city immediately began to make plans to turn it into its city airport, replacing Mueller Airport, which is located close in amid a residential area. According to Duck, the airport will be ready by the end of the decade and will offer considerably enhanced facilities for the industry giants that continue to move into the city.

Probably one of the hottest industrial markets in the entire Southwest now is El Paso. According to Robert M. Keller, SIOR, of James A. Keller Realtors, El Paso has a 2% vacancy rate in its 36 million sq. ft. industrial inventory.

"At the present time, there are over 2 million sq. ft. under construction and all of it is already leased," he says.

One of the newest tenants is GATX Warehousing Co., a public warehouse that has leased 400,000 sq. ft. in two buildings. A Japanese wire harness firm, Sumitomo, recently leased 112,000 sq. ft. Also, UFE, an injection molding firm from Minnesota, was able to lease a 100,000 sq. ft. building.

Due to the scarcity of office buildings, Keller reports that AT&T recently leased a 100,000 sq. ft. industrial building and turned it into an office to handle telecommunications for Mexico. Approximately 400 people will be employed at the facility.

"We're just out of space," he continues. "As soon as the spec space comes out of the ground, it is absorbed. And, many of the manufacturers who have maquila plants across the Rio Grande are demanding that their suppliers move to our area to supply their needs. Shipping from Chicago or somewhere in Ohio just takes too much time. And, we are also seeing great interest from those companies who want to settle here in order to be close to sales in Mexico."

Albuquerque is also seeing increased interest in industrial space due in part to its proximity to Mexico and its location along one of what has come to be called the "NAFTA Corridors."

Expansions and the influx of new industrial users have sparked a resurgence in the industrial market, according to Vic Bruno SIOR, of Vic Bruno Co.

"Some of the industrial space is being used for back-office operations, due in large part to the bilingual makeup of Albuquerque's work force," Bruno says.

Some of the current projects under way in Albuquerque include a 23,000 sq. ft., $16 million build-to-suit for Silmax Corp., a firm that recycles and tests damaged wafers for the computer industry,

"Intel's 1 million sq. ft. expansion is almost complete, but we are continuing to see their suppliers coming in looking for space. We are also getting other high-tech users, Bruno says. "Martin Marietta Tech Ventures Corp. recently leased 63,200 sq. ft. in The University of New Mexico University Center Research Park, and Motorola Ceramic Products Division recently expanded their plant by 47,000 sq. ft. to bring the total space up to 169,000 sq. ft.

"Activity here continues to gain momentum as more and more high-tech firms move in and their suppliers have to follow," Bruno concludes.

The NAFTA Corridor through Albuquerque is I-25 from El Paso, a road known to the Spanish Conquistadors as "El Camino Real" because it begins in Chihuahua City, Mexico. This particular corridor ends in Denver, which, according to Brad Calbert, president of Colliers Bennett & Kahnweiler, is "the jumping off place for distribution to an eight-state area."

"It is the largest area geographically, with the smallest population base," he says.

But, distribution is not all that's happening in Denver.

"Anything industrial under 25,000 sq. ft. has tenants bidding on it," says Calbert, "because demand is far exceeding supply. Our citywide vacancy rate stands today between 4% and 5%." He refers to this as a "space scramble."

"A great deal of the growth is internal, which is the best kind, but we are also seeing some companies coming in from all over the country, from the Midwest, East Coast and West Coast, he continues. "A good example of that is the fact that 97,000 new driver's licenses were issued just last year."

Much of the influx can be attributed to the very advanced telecommunications systems in place in the Denver area, Calbert notes. "U.S. West, Sprint, MCI and a number of back-office players are coming into the market. Merrill Lynch, for example, just purchased 35 acres of land for a campus which will consist of from 1 million to 1.5 million sq. ft. by the turn of the century."

Phoenix is another growing industrial market.

Predicting that 2 million sq. ft. of spec space will be built and occupied by the end of 1995, John Creedon, a commercial real estate agent with Grubb & Ellis, is also seeing a sort of a land rush in particular parts of the area.

"The area on the west side of town, in the area of 99th Avenue and I-10 is getting a great deal of attention. Wal-Mart, Goodyear, Albertson's, Smith's and Rickett & Coleman have already moved into that area and, at this time, another 150,000 sq. ft. of spec space is planned there," Creedon says.

Phoenix has seen a resurgence of industrial activity for the past few years, in part because of the completion of I-10 into California. Numbers of California firms have moved to the Phoenix area, and as John Creedon notes: "We are an emerging city. At one time, we saw a 100,000 to 150,000 sq. ft. building as our biggest user. Today, we are not surprised to see 400,000 sq. ft. deals."

When it comes to distribution, Reno has a lock over a number of California sites, because of tax structure in Nevada.

One example is the new Patagonia distribution facility moving to Reno from Ventura, Calif. The new 170,000 sq. ft. facility to handle their Western distribution will be located in Reno West Business Park. Another building of the same size on the drawing board is to handle their entire U.S. distribution. Other industrial users are finding Reno to their liking. International Game Technology (slot machine manufacturers) is constructing a new 1 million sq. ft. corporate headquarters in South Meadows Business Park, and other industries are following suit.

"This area is a good, stable market, allowing for steady growth," says Roger Christianson, vice president and COO of Dermody Properties. "It has continued to attract institutional and institutional-type investors, as evidenced by the recent acquisition of over 2 million sq. ft. by the Utah State Pension Fund. Also, some real estate investment trusts have recently entered the market."

He continues, "Dermody Properties and Dermody Industrial Group (a joint venture between Dermody Properties and the California Public Employees' Retirement System) developed or acquired over 1 million sq. ft. in 1994, and we estimate the same level of activity for 1995.

"Our so-called spec buildings are actually targeting a different customer base. We build multitenant distribution centers to serve businesses which need as little as 10,000 sq. ft. By sizing our multitenant projects in the 100,000 to 300,000 sq. ft. range, we are able to offer the smaller user a more competitive rent than they would be able to achieve in a freestanding building. At any time, Dermody has two to four buildings through the planning and entitlements stage, so we can meet any client's most demanding time schedule," Christianson concludes.

In Las Vegas, Ken Waltz, Las Vegas area manager for Dermody Properties, reports that industrial demand continues strong.

"The upturn in industrial activity that began to appear in early 1994 was under way in earnest by the third quarter, with the prelease of our new multitenant facility to JCM North American, a manufacturer of bill exchangers. We have also signed a lease for 87,400 sq. ft. with Pacific Snax, the manufacturer and distributor of Vegas Chips," Waltz continues.

"We recently sold 12.5 acres to PACCAR, the Seattle-based Fortune 50 manufacturer of Kenilworth and Peterbilt trucks," he adds. "They are constructing a 120,000 sq. ft. building, which is the first phase of a 200,000 sq. ft. parts distribution warehouse."

In the West, activity gains momentum

On the West Coast, industrial activity is possibly not quite as hot, but it is gaining momentum.

In Seattle, for example, Jerome E. Mathews, chairman of Kidder, Mathews & Segner and current president of SIOR, says that the supply of large bulk distribution facilities in his area is scarce. "We are seeing only 4% vacancy," he remarks.

"At the present time, a couple of developers are discussing building, 150,000 sq. ft. of spec space," Mathews. "Our major distribution market is between Seattle and Tacoma today, but we are seeing the area north and east of Bellevue as the major future growth area.

"Our area, primarily because of The University of Washington, is a leader in the biomedical field," he maintains, "and we are continuing to see expansions in that sector. The university is second in the United States in research grants for cancer research."

With Microsoft based in Seattle, software is another prime export, and numbers of other companies serving that group are seeking industrial space in the area.

"In a bigger picture, we see a continued resurgence in the marketplace with a gradual trend toward the `days of the landlord,'" Mathews says. "There will be continued emphasis on our international trade and it is my judgment that major companies that are not in the international marketplace within the next 10 years just won't be in business."

Farther down the Pacific coast in San Francisco and Oakland, foreign trade is a major factor, particularly in Oakland where huge containers are unloaded at a modern container port. The San Francisco market is not a big factor since most of the port facilities have become obsolete, but trade with the Pacific Rim countries continues to fuel industrial growth in Oakland. The Los Angeles area and the ports of Los Angeles and Long Beach are seeing a continue increase in shipping from the Pacific Rim.According to Louay Alsadek, vice president of Prentiss Properties Ltd., one of the largest owners and managers of industrial property in the Los Angeles and Orange County area, the firm has 6.5 million sq. ft. of industrial space to oversee in that area.

"In December 1993, we showed an 86% occupancy rate. That changed to 95% by the end of 1994. We are seeing tremendous leasing activity and a few sales," he says.

"A lot of lease rates dropped drastically and we are now attracting tenants that had moved away, but now are moving back," explains Alsadek. "One good example is Freeman Cosmetics Corp. They moved to Henderson, Nev., a few years ago. Last year, we moved them back to Southern California with the help of the city of Compton and the state of California. They have now leased a 150,000 sq. ft. building for their operations.

"Pacific Rim companies are moving in to back fill the space, especially in the South Bay area," he remarks. "Vacancies have dropped a lot of five-and 10-year leases are being signed. To add to that, concessions are tightening. Now there is only one or two months' free rent with a five-year lease and the effective lease rate is 10% over what it was last year at this time."

According to Alsadek, the hottest market in Southern California is the Inland Empire, where rents ;ire LIP 15% to 20% and "where we have several spec projects under construction." He also notes that institutional buyers, such as J. P. Morgan, are coming in and picking up large blocks of industrial space.

Quoting the 1995 Grubb Ellis Southern California Real Estate Forecast, he says that the total industrial space in the area in which he operates is 1,216,634,000 sq. ft. Of that, 154,557,000 sq. ft. are vacancy, giving the area an overall vacancy rate of 12.7%. The gross leasing activity in the area in 1994 was 85,142,000 sq. ft.

Another aspect of the industrial market, according to Trammell Crow's Lippe, is that 30% of the Fortune 500 companies are now outsourcing their warehousing needs and new contract warehouses houses are having to be constructed to meet their needs. "They are demanding high-tech, clear heights, large truck courts and other things which will help save them money. Theirs is a tight margin business and it looks as though outsourcing of this type is definitely the trend of the future in the industrial field."

Feola, Carli & Archuleta Architects, Glendale, Calif, have confronted another aspect of the Southern California market. A $14 million, 197,000 sq. ft. building located at Valencia Commerce Center Drive and 28150 Industry Drive for ITT Aerospace Controls Inc. was under construction when the January, 1994 earthquake hit. But earthquake building codes were being rigidly followed and the building survived nicely. The project is part of a long-term build-to-suit lease with Newhall Land and Farming Co., Valencia. Hewson Co., Sylmar, Calif., was the developer.

Kay Tiller is a Richardson, Texas-based freelance writer who contributes frequently to Southeast Real Estate News.

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