As the economy recovers and e-commerce thrives, more and more developers are looking to invest in industrial properties and distribution centers. This article references the southern California region known as the Inland Empire, but distribution centers are popping up all over the country. Located between major cities like Miami, Tampa, and Atlanta and in close proximity to I-75, Alachua County is a great place for distribution centers and industrial facilities. To learn about Front Street's industrial listings, click here.
By Erica Phillips | The Wall Street Journal
ONTARIO, Calif.—At a 500,000-square-foot warehouse here, newly arrived shipments of New Balance shoes whiz down conveyor belts and spiral chutes to be scanned, sorted, packed into larger boxes and shipped to far-flung destinations.
The New Balance distribution center, located about 40 miles east of Los Angeles in a Southern California region known as the Inland Empire, is one of a rising number of large-scale warehouses into which local governments and developers have placed their hopes for an economic renaissance.
Prologis's Ontario, Calif., facility, a New Balance distribution center
Banking on the desert region's proximity to the nation's busiest ports and major freeways, industrial real-estate companies are gobbling up vast parcels of land to build logistics hubs for big-box and online retailers.
"From here you can pick your poison," says Tyson Chave, vice president at industrial real-estate developer—and New Balance's landlord—Prologis Inc. Mr. Chave calls the nearby sweeping, multilevel freeway interchange of the I-10 and I-15 freeways, "Main and Main."
But much of the new construction is speculative, meaning developers are looking for tenants even as the walls are raised on new buildings. Prologis, for example, just completed an 800,000-square foot warehouse in Redlands, Calif., that has yet to be leased.
Speculative development was the rage in all commercial real-estate sectors before the economic downturn. But developers of office buildings, shopping centers and most other property types have been slow to return to this high-risk strategy, primarily because they can't obtain debt financing.
Developers of distribution facilities have been the first to plunge back into the speculative pool. They can do this partly because their projects are less expensive than office towers or malls, and they can finance them without taking out big loans.
The Inland Empire, which handles about 75% of the goods imported through the ports of Los Angeles and Long Beach, is the extreme example of this trend. Of the 13.8 million square feet of warehouse space under construction in the Inland Empire, over 68% is speculative, according to analysis by commercial real-estate services firm Cushman & Wakefield.
By comparison, the Dallas-Fort Worth area, the second-largest region for industrial development, has 10.6 million square feet under construction, 40% of which is speculative.
In the Inland Empire, developers are taking a gamble in a region that is at the mercy of trends in global trade beyond its control. For example, the expanded capacity of the Panama Canal—scheduled for completion in 2015—threatens Southern California's import volumes, as larger ships will be able to bypass the region for other ports. The Los Angeles and Long Beach ports handled 14.1 million containers in 2012, accounting for more than 40% of the total number imported to the U.S. annually.
"If there's any region that has the most to lose, it's definitely Southern California and the Inland Empire," says Ferdinando Guerra, an economist with the Los Angeles County Economic Development Corp.
And the Inland Empire still has much ground to make up since the recession. The region set records nationally in foreclosures, falling home values and unemployment, which hit 14.6% in January 2010. The amount of surplus warehouse and distribution space soared to 36 million square feet at the end of 2008.
But as the economy recovered and demand increased for consumer goods, much of that space was absorbed. The first green shoots of speculative development began appearing in the Inland Empire as early as 2011.
Regional economists are optimistic. They point out that growth in imports has coincided in recent years with a retailer trend toward larger warehouse facilities, which are believed to improve supply-chain efficiency.
Also, as online retail grows, regions such as the Inland Empire are filling up with so-called e-commerce fulfillment centers, where online orders get filled and shipped. Amazon.com Inc. in late July announced it was hiring 5,000 full-time jobs in 17 fulfillment centers across the U.S., including a 951,000-square-foot facility in San Bernardino, Calif., that opened last fall.
The region's convenience and relatively low rental rates have recently attracted companies including Home Depot Inc., Samsung Electronics Co., Bayerische Motoren Werke AG and Best BuyCo. Vacancy rates in the region have fallen to 5.4% so far this year from more than 9% in 2009, according to research by real-estate services firm CBRE Group Inc.
Economists say the expanding industrial real-estate market may lift other parts of the economy and local governments hard hit by the downturn. Last year, for example, the city of San Bernardino entered bankruptcy proceedings.
Jim Morris, chief of staff for San Bernardino's mayor, says the new Amazon.com facility will provide an average of 1,200 jobs, and another e-commerce facility that opened in 2010 has added about 500 jobs.