Southern California focuses on Its lack of space, while San Francisco’s tech boom buoys its East Bay industrial submarket

The Resurgence of Manufacturing in Southern California Will Produce More Deals

As the economy continues to recover, so will Southern California’s commercial real estate market. In fact, we have already seen signs of some recovery in certain sectors. The fact that virtually no new construction has taken place in the past several years will help improve the overall market as vacancies continue to decrease. One of the sectors that seems to be thriving is the industrial market for larger industrial and manufacturing facilities. This is due, in part, to a
limited supply. It is also due to the corporations that are now in growth mode after years of reductions and consolidations.

Southern California’s geography, particularly in Los Angeles and Orange County, also provides for a limited amount of opportunities to build new larger industrial and manufacturing facilities. This fact, combined with the number of older buildings that are now deemed inefficient by today’s standards (many do not provide adequate power requirements, ceiling height, loading capacity or functionality), makes many of the region’s vacant spaces obsolete and not realistic options for prospective tenants.

The overall available space for larger big box industrial and manufacturing facilities in Los Angeles and Orange County is extremely limited. Estimates have put vacancy at 1 percent to 3 percent in this region. While the vacancy in the overall market may be as much as 10 percent to 15 percent, these specific submarkets have limited opportunities. A few of the other markets throughout Southern California, such as the Inland Empire and parts of San Diego County, have higher vacancies. However, the amount of vacancies for these bigger buildings has dropped dramatically over the past 18 months.

During the economic downturn, many of the smaller, entrepreneurial manufacturing companies based in Southern California either went out of business, were acquired by larger companies or elected to relocate out of the area due to the high cost of doing business in this region. Those companies, which did not have to be in Southern California, found opportunities either overseas, in Mexico or other Western states that were significantly cheaper than this area.

The companies that stayed and are in older and/or inefficient buildings now have an opportunity to take advantage of the real estate market while rates are at am all-time low. In the leasing sector, concessions like tenant improvements, free rent and lower rental rates provide an additional incentive for a tenant to relocate. Many manufacturing companies have significant upfront expenses to relocate equipment and make the necessary improvements for their businesses. These upfront concessions provide the user with the opportunity to defray these initial relocation costs. Being located in a more efficient and/or newer building makes these businesses more profitable and efficient.

The benefits to a landlord of renting to a manufacturing company are twofold. The manufacturing company will typically be in a position to pay a higher rental rate, while a manufacturing company will be interested in signing a longer-term lease (i.e. 10 to 15 years, as opposed to a distribution company that typically looks for a three- to five-year lease). The upfront costs and disruptions to relocate a manufacturing company make relocation a rare event. Distribution companies will have more opportunities for changes in their business and spatial requirements and may not want to be locked into a longer-term lease. A landlord who is looking for long-term cash flow may want to consider renting to a manufacturing company rather than having to re-lease the building every few years.

As the real estate market continues to recover, it will present new challenges and nuances both for landlords and tenants as they try to find the right partners to structure mutually beneficial transactions. Tenants that are consolidating or relocating should utilize professionals and consultants to help them assess relocation costs and structure a transaction that accommodates their business requirements. Savvy tenants will be able to take advantage of the market and will benefit from a new and hopefully more efficient facility while prices are still on the lower end of the spectrum.

Industrial Real Estate and Its Strong Airport Ties

Today, many generally Perceive our economy and the real estate markets
as a continual struggle. However, there are silver linings in various submarkets throughout the Westen U.S. that appear to have weathered the storm, gotten onto a road of recovery and provided greater opportunities for investors and landlords.

When it comes to the West, the industrial real estate markets; which are tied to distribution, trucking and shipping, are in far better shape than those that have no tie to industry, workforce or amenities.

A prime example is the industrial submarkets in Los Angeles County, which are in close proximity to LAX Airport and to the Port of Los Angeles. While Southern California is the most dynamic and largest real estate market in the West, it is also composed of numerous micro-submarkets. The industrial submarket surrounding LAX has a vacancy rate that is significantly less than that of the overall marketplace.

While many of the buildings in this submarket are older and less efficient,
the lack of available real estate and the necessity for those companies to be near the airport make them extremely more desirable than those in other submarkets. This is especially true when you consider the airport submarket’s ease of access, the current costs of labor, gas and transportation and the major congestion along most Southern California freeways.

This desirability extends just south of the airport to the South Bay’s industrial submarket. In this region industrial facilities located near the Port of Los Angeles are in high demand. Many businesses that are tied to the materials and goods that arrive through the port cannot afford to be located farther away from their drop point. The additional costs in mileage, as well as the expected time
delays, make it much more difficult and expensive to operate farther away from the port” Additionally, many of the third-party logistics companies have been in growth mode as more and more corporations look to outsource these functions and cut costs. This has caused increased demand in that submarket, and has buoyed the
rental rates.

The same concept holds true for a few of Southern California’s other
metro areas, such as Burbank, San Diego and Ontario – all of which have
airports. The industrial submarkets within close proximity to these airports have lower vacancies and higher rental rates than those located farther
away. Clearly, the concept of “location, location, location” adds significantly
to a property’s value. This has been proven true even during struggling real estate markets.

Aside from location, there are many other amenities inherent to airport hubs that provide additional incentives for tenants, Corporate executives visiting one of their Southern California-based facilities will typically desire amenities like hotels, restaurants, fitness centers, etc. The submarkets surrounding the airport areas tend to have a greater depth of options than its outlying areas.

This is true in other Western markets like Seattle, Phoenix and Las Vegas as well. With increased pressure to control operating costs and to provide efficiencies in delivery methods and operations, companies will look to facilities that allow them
efficiencies and cost savings. It is for that reason that you see these specific
submarkets in the major metro areas continue to hold their grounds even through these difficult times.

In today’s difficult economic times, it is important for management companies and owners of multifamily and commercial real estate to look for ways to trim expenses, maintain cash flow and survive until the markets can improve. It is safe to say that every company whether directly related to the real estate industry or not, has been and is in the process of continuing to run as lean and mean as possible. These moves include personnel changes and lay-offs, consolidations, revamping of expenses and compensation structures. Once a company has finished with its “tightening of the belt,” the only way for the firm to continue to be successful going forward is to maintain positive client relations and maintain occupancy levels to keep its properties full.

There is no question that whether you own an apartment building, industrial complex or
an office building the name of the game in today’s environment is to A) keep your property full, (B) to work with your existing tenants as best you can and (C) try to attract new tenants to fill your vacancies. It is for these reasons that the single most important focus of a property owner or a management company is to look at the properties existing tenant base and ensure that your managers are doing whatever they can to maintain and improve their tenant relations.

When it comes time to discuss lease renewals or your tenant’s financial ability to pay, the initial reaction of a tenant is to focus on all the negatives associated with their living or working environment. Tenants don’t forget the leaky roof, the running toilet, the air conditioner that broke in the middle of summer or any of the inconveniences that are beyond the control of a property owner, but nonetheless, become the owner’s legacy and misfortune to deal with. Tenants don’t seem to remember how quickly you rushed out to fix those problems or how much money it had cost to clean them up or the extra expense that you incurred to do the work after hours so as not to disrupt their world any more than need be. In addition, tenants don’t seem to remember the late night phone calls and expect and demand that their property management issues always float to the top of the list and should be more important than others. With that said, they are the customer and it is your job as the manager/owner to ensure that you have good customer relations whatever that takes (within reason). For this reason, when the lease renewal comes up, instead of using all of the negative items from the past, the conversation takes a completely different tone and now focuses on the tenant’s business or financial condition and their ability to pay going forward.

Everyone wants to talk about how soft the real estate market is and how they should
receive a discount as a result of that. There is no argument by any owner or management
company that the real estate market is soft nor does it require much discussion to agree with
your tenant. But that is not the crux of the conversation. The conversation as a concerned
property manager and owner is that you have a viable tenant that can afford the rent on the
property and that they will be there to pay in a timely fashion in the future.

The second key in maintaining good tenant relations is to make sure you are constantly
in communication with your customer. Whether that involves newsletters, email notices and
updates as it relates to their occupancy, or cards, thank you letters or best wishes for the
holidays. Believe it or not, those items go a long way towards establishing a positive working
relationship. If the tenant does not have the desire or need for communication back, it is
important for the property manager or owner to be proactive in establishing and continuing this working relationship. Chocolates on Valentine’s Day, a holiday card for the New Year or even a simple visit by the management or owner to check in on their tenant and make sure everything is okay, are the basic steps which must be taken.

Knowledge is key in any negotiation and understanding the goals and objectives of the
person or entity on the other side of the negotiating table is paramount in structuring a “win-win” conversation or transaction. Without good tenant relations and customer service, you as the property owner or management, automatically put yourself at a deficiency or run the risk of jeopardizing your future relationship with your tenant. Being an informed, proactive, concerned and educated landlord will ease the strain of today’s economy and produce better tenant relationships in the long run.

In today’s difficult economic times and challenging real estate markets for both residential and commercial real estate throughout the country, it is important for management companies and owners of multifamily and commercial real estate to look for ways to trim expenses, maintain cash flow and survive until the markets can improve. It is safe to say that every company, whether directly related to the real estate industry or not, has been and is in the process of continuing to run as lean and mean as possible. These moves include personnel changes and lay-offs, consolidations, revamping of expenses and compensation structures. Once a company has finished with its “tightening of the belt,” the only way for the firm to continue to be successful going forward is to maintain positive client relations and maintain occupancy levels to keep its properties full.

There is no question that whether you own an apartment building, industrial complex or office building, the name of the game in today’s environment is to: keep your property full, work with your existing tenants as best you can and try to attract new tenants to fill your vacancies. It is for these reasons that the single most important focus of a property owner or a management company is to look at the property’s existing tenant base and ensure your managers are doing whatever they can to maintain and improve their tenant relations.

Remember, tenants never forget. When it comes time to discuss their lease or their financial ability to pay, the initial reaction of a tenant is to focus on all the negatives associated with their living or working environment. Tenants don’t forget the leaky roof, the running toilet, the air conditioner that broke in the middle of summer or any of the inconveniences that are beyond the control of a property owner, but nonetheless, become the owner’s legacy and misfortune to deal with. Tenants don’t seem toremember how quickly you rushed out to fix those problems, how much money it cost to clean them up or the extra expense that you incurred to do the work after hours so as not to disrupt their world anymore than need be. In addition, tenants don’t seem to remember the late night phone calls and expect and demand that their property management issues always float to the top of the list and should be more important than others. With that said, they are the customer, and it is your job as the manager/owner to ensure you have good customer relations.

For this reason, when the lease renewal comes up, instead of discussing the negative items from the past, the conversation should take a completely different tone and focus on the tenant’s business or financial condition, and their ability to pay going forward.

Everyone wants to talk about how they should receive a discount as a result of the soft real estate market. There is no argument the real estate market is soft, nor does it require much discussion to agree with your tenant. But that is not the crux of the conversation. The conversation as a concerned property manager and owner is that you have a viable tenant that can afford the rent on the property and that they will be there to pay in a timely fashion in the future.

The second key in maintaining good tenant relations is to make sure you are constantly in communication with your customer, whether that involves newsletters, e-mail notices and updates as it relates to their occupancy, or cards, thank you letters or best wishes for the holidays. Believe it or not, those items go a long way toward establishing a positive working relationship. If the tenant does not have the desire or need for communication back, it is important for the property manager or owner to be proactive in establishing and continuing this working relationship. Chocolates on Valentine’s Day, a
holiday card for the new year or even a simple visit by the management or owner to check in on their tenant and make sure everything is OK, are the basic steps which must be taken.

Knowledge is key in any negotiation and understanding the goals and objectives of the person or entity on the other side of the negotiating table is paramount in structuring a “win-win” conversation or transaction. Without good tenant relations and customer service, you as the property owner or management automatically put yourself at a deficiency or run the risk of jeopardizing your future relationship with your tenant. Being an informed, proactive, concerned and educated landlord will ease the strain of today’s economy and produce better tenant relationships in the long run.

As real estate markets around the country continue to tighten and as the rapid recovery and upswing of the commercial real estate cycle continues, many markets are experiencing vacancy rates in the single digits — which makes finding available product difficult for many tenants. In Southern California in particular, desirable properties often have multiple bidders, both for acquisition and for lease. In many sub markets there are even bidding wars for available space.

As the economy recovers and companies continue to expand, many users of commercial real estate find themselves in need of new and/or additional facilities to not only upgrade systems and equipment, but to meet future expansion needs as well. In many instances, tenants find themselves looking to build-to-suits to accommodate their expansions due to the lack of available product. These build-to-suits can come in the form of a developer constructing a new facility that the company would lease or buy at its completion. The ultimate cost to the user in this scenario is a function of the price of land, cost of construction, and the cost of money available to the user and/or developer. In many cases,these costs are in excess of current market rents for existing product and, although such an arrangement gives the user the ability to expand, additional financial commitment is required.

Exploring an Alternative Option
Recently, The Saywitz Company,a national commercial real estate brokerage and consulting firm head-quartered in Orange County, found itself facing several scenarios in which clients were looking to expand their operations throughout Southern California. However, like other areas around the country, many of the markets in Southern California are extremely landlord-oriented and, as a result, available product is scarce and rental rates continue to climb.

To accommodate its clients’ expansion plans and control real estate costs, the real estate firm implemented an innovative concept called the Purchase Partial Lease Back (PPLB). Essentially, the PPLB combines the concepts of both the build-to-suit, purchase, and leasing scenarios all into one transaction which goes something like this: the user will either purchase or construct a new facility to accommodate its requirements. However, because the company is uncertain about its growth rate and may not want to commit to additional cost, it will construct a facility that exceeds its immediate square footage requirements. The company then owns the facility and can lease back the portion of the facility that it doesn’t currently need to another tenant. The idea is that the rental income generated from the new tenant will offset — in part or in full — the company’s financial obligations for the new facility, thereby giving it the flexibility to gradually grow into the facility and reduce overall real estate costs.

Of course, the dynamics of the marketplace, the financial stability of the user, and future projections for the market and the user’s growth must all be considered in formulating this transaction.

Rewards and Risks
As in any real estate transaction,there are both rewards and risks associated with PPLBs. The major benefits include ownership, flexibility,and cost savings. First of all, owner-ship of a property provides tax incentives to the principals of the company,and projected appreciation of the asset as a whole offers an additional upside. Secondly, a PPLB arrangement gives the owner flexibility to control future growth. The user can rent out the excess space for short-or long-term leasing to coincide with its future growth plans and gradually ease into the overall size of the building. Finally, companies can realize significant cost savings. For example, when financial analyses are performed on a build-to-suit lease transaction versus the PPLB, the over-all expense of the latter can result in a 30 to 50% bottom-line cost savings to the company.

Another plus: the lease signed with the tenant for the excess space in the building will typically have annual increases, while the user’s mortgage will stay fixed for the length of the mortgage. In time, the monthly expense to the user decreases as his rental income increases.

Of course, as alluded to earlier, PPLB transactions are not without their risks. Such transactions are, for instance, vulnerable to future downturns in the real estate market. Although today we are certainly in the cycle of the real estate market, should the real estate market take a downward turn, the user may be left with an asset that could be worth less than what it paid for the property. However, as long as the user continues to utilize the facility, the cost will still be cheaper than renting.

Another potential negative to the PPLB is that the user must assume ownership responsibilities. The user is now responsible for maintaining the facility and resolving any issues with its tenant. After all, in this arrangement the user is, in effect, the landlord. While this “risk” can be alleviated by hiring a third-party manager to oversee those responsibilities, it is still an issue that must be considered.

A third risk relates to finding a tenant. As would be expected, additional costs may be incurred by the user if a portion of the facility remains vacant for a period following completion. This could certainly alter the financial analysis and require additional up-front costs until a tenant is found. It should be noted, however, that the typical PPLB involves new construction, giving the user a minimum of 6 to 12 months to market the property prior to its completion.

Assuming this transaction is structured in a market that has decreasing vacancies and increasing rental rates, there should be no difficulty in finding a tenant prior to completion of the building.

In summary, the risks involved with these transactions relate to the future stability of the real estate market and the business projections of the user. Should a company employ an entrepreneurial strategy to take advantage of the current real estate market, favorable lending practices, and increased rental rates,the rewards can increase the company’s bottom-line performance and give it control of its own destiny with respect to its real estate use.

Cases in Point
Several Southern California companies are already considering whether PPLB transactions are the way to go for their businesses. One Saywitz company client, for example, recently acquired a manufacturing/distribution facility in Oceanside to meet its expansion requirements. After a thorough analysis of the marketplace, executives realized that the increasing rents made it more expensive to occupy additional space than to actually own the property themselves. The PPLB afforded them the ability to not only acquire a larger property that will ultimately accommodate their future growth plans, but also provided an end result in which leasing out approximately 50% of the building will reduce overhead expenditures to 20 to 25% below the cost of leasing a similar facility. Since the company opened escrow on the property less than six months ago, the rental rates in that market have already increased 10 to 20%. The company expects the value of their property to increase in excess of $1 million within the next 12 months.

Another potential success story may be found in an international manufacturer and distributor of hair care products headquartered in L.A. County. The company’s current international headquarters consists of three buildings, but the firm is exploring the advantages of the PPLB. The preliminary analysis indicates a potential savings of $2-4 million over the next 5 years by employing this process.

Similarly, another manufacturer and distributor headquartered in L.A.County is exploring the possibility of constructing and owning a 450,000-square-foot facility to accommodate its new corporate headquarters and distribution needs. A facility of this size located in Los Angeles will allow the user to take advantage of economies of scale and significantly reduce construction costs by utilizing the size of the facility. The net mortgage cost in this case could be as much as 50% lower than leasing a comparable facility.

While each of these companies’ motivations and desires are different, one thing remains true for all: PPLBs not only allow them to control their own growth in the future but also offer the opportunity to reap the benefits of a rising real estate market and the tax benefits associated with ownership. In fact, it’s such an appealing concept that The Saywitz Company itself is practicing what it preaches: The company recently purchased its own building in Newport Beach for its headquarters.

The Bottom Line
The user who understands the risks and rewards associated with PPLB transactions and employs a solid investment analysis combined with future growth projections will be able to either acquire or construct a new facility that allows them to incorporate better efficiency and use of space, along with technological change. Such users will be able to place an asset on their balance sheets rather than a rent expense and significantly reduce overall real estate costs.

Being an entrepreneur is about envisioning a better way to do something, and then making the vision a reality. Sometimes, in the process, entrepreneurs create something new which becomes bigger than they could have imagined in their wildest dreams. Meet Barry Saywitz. “I’m not an entrepreneur who sat at home and thought up a great invention,” he says. “I took principles and concepts, and tried to expand on them and create a niche where I could be successful.”

Saywitz is founder and president of The Saywitz Company, a commercial real estate brokerage and consulting firm with 25 employees headquartered in Newport Beach. Recently, Saywitz was the youngest nominee on National Real Estate Investor Magazine’s list of the 40 most influential people in real estate underage 40.

Which means that he was only 26 when he got an entrepreneurial company off the ground during one of the worst real estate markets in recent history, and 27 when he started the CORE (Commercial Real Estate) Network, an I’ll help you-you help me umbrella organization pooling there sources of 80 plus commercial real estate firms with offices In more than 120 cities throughout the U.S.

Saywitz comes across as a wise 34-year-old, and maybe that’s because he’s achieved his success by dint of hard work and trial and error.He began his career as a commercial real estate broker in 1990 working for Howard Ecker and Company in Orange County. The office setup was Stone Age compared to today; three brokers shared two desks and a phone in an interior office of an executive suite no bigger than a closet. Although the early ’90s seem like recent history, the brokers had no computers to back them up, index cards were the high-tech tools of choice, and any pay they earned came from commission. Saywitz says, “It’s not a good feeling when you get down to your last couple of dollars. You don’t have 100 percent control over whether someone signs a deal.” Then, in 1992, the local real estate market hit bottom. At this not-so-opportune time, Saywitz became a partner in Howard Ecker, and in 1994 he bought the West Coast operations of the company and changed the name to The Saywitz Company.

The traditional method of building up business in commercial real estate has always involved exploiting personal connections. Saywitz thought there must be a better way to build a real estate business. “At the time,” he says, “I interviewed with other real estate brokerage companies throughout Southern California and asked them about their game plans. No one really had one in terms of developing business other than basing it on personal relationships. Since no one had a compelling plan, I decided to give it a try.” Because of the poor market conditions, Saywitz had chosen a difficult time to buy in. But he believed there had to be a process for cultivating and generating business other than playing golf. “When I started,” says Saywitz, “It was just me and a secretary. I’d go out in the morning and canvas buildings to generate prospects and leads. Then I would go back to the office and call on the leads, and later, in the evening, send out follow-up letters and information.”

“I taught myself how to use a computer and type out of necessity. I would go home at 2 a.m. and comeback to work at 6 a.m.” The more information Saywitz gleaned the more he saw that, especially at that time, it was a tenant’s market. So he concentrated on representing tenants. But he wasn’t content to stop at developing a focused process of target marketing to grow his client base.

As his company grew, he realized that in a typical real estate company, each broker functioned essentially as a company within a company. A broker was responsible for all aspects of his business; cultivating leads, turning them into clients, closing the transactions, and starting over. Saywitz found this inefficient. “I was strong in all these areas,” he says, “but operating like that was not a good use of my time. So I decided to structure my company more like a corporation.” The Saywitz Company has a research department to procure leads and prospects, a marketing department cultivating new business, brokers to work on the transactions, and a technical and administrative support department.

Saywitz’s next and most far-reaching innovation came when his company began to deal with large companies with a national presence. A client they were representing in Southern California would come to them and ask, “What do you know about Atlanta?” While general real estate knowledge is similar throughout the United States, there’s no substitute for expertise in the local market. Being a local Southern California company suddenly had its limitations, since they were competing with larger national real estate companies for business. So the Saywitz Company would engage the services of a local company in brokering the deal. But often, the local company they hooked up with would turn out to be part of a competitor company, or we would get some junior guy working on our deal. “In 1996,” says Saywitz, “I saw I needed to develop a platform to expand our business on a national basis. This would help us compete both nationally and locally, and help us give our clients what they needed. ”

Saywitz looked at other national organizations for ideas, hiring one of the former heads of real estate for Bank of America to analyze how other companies went about obtaining and servicing national business between cities. Saywitz’s model incorporated the best ideas from each. Together with a Los Angeles real estate firm, he developed the CORE network, a mutual benefit, nonprofit organization similar to the NFL in structure. He identified cities where he wanted an affiliate partner, starting with a list of 600 local entrepreneurial firms compatible with the CORE network’s goals. Clearly, he had struck a common nerve, as almost every single firm he contacted elected to participate. After a recent merger, CORE is now the sixth largest real estate brokerage organization in the country, conducting $17 billion in transactions in 2001, and Saywitz now serves as Chairman.

His next challenge was figuring out how to weather the ups and downs of the real estate market. “It’s difficult for those with monthly obligations to be in this type of industry,” says Saywitz. So he determined he would convert his success in the brokerage business into a solid monthly cash flow by purchasing multi-family investment properties with his profits. “It’s nice to be a landlord,” he says. The rent creates cash flow, which can supplement or offset the ups and downs in the brokerage business. Today, the Saywitz Company has a separate division, which buys multi-family apartment buildings near the beach, a construction crew that renovates them, and a division to manage them and handle the leasing.

Never afraid to try something new, Saywitz feels his biggest gamble so far was going out on his own during the worst economic times, with no real mentor or company structure to support him. “In facing all those first-time issues,” says Saywitz, “I made some mistakes. I try to share those with others so they don’t make the same mistakes.” His goal for The Saywitz Company is to grow to the point where it is a consistent force in the marketplace. By refusing to accept the status quo, Barry Saywitz has managed to create not only a strong local company with a wide national reach, but a nation wide network of affiliates working together to keep their clients happy. But don’t take your eyes off him yet…as young as he is, there are certainly more innovations to come.