Industrial Operators Cash Out

Wirgler-April22

Originally published by The Real Deal


For 35 years, Universal Warehouse Company, a trucking and logistics firm, owned its own warehouse in the South Los Angeles city of Carson. 

The firm did everything out of the facility: yard storage, warehousing, trucking and transloading, where goods are moved from one mode of transportation to another. And the warehouse was in a prime trucking location — four minutes to the 710 Freeway and another 20 minutes to the twin ports of Long Beach and Los Angeles, one of the world’s biggest container shipping hubs. 

The warehouse itself covers a small fraction of the property’s overall land, making it good for storing trucks and shipping containers on site. The 206,700-square-foot building is located across almost 20 acres, or 435,600 square feet. 

All of those factors — the location, the low land coverage, the capacity for yard storage or parking — drew a buyer with a heavy purse. 

In June, industrial real estate investor CenterPoint Properties bought the complex for $125.8 million — $100 million more than Los Angeles County’s assessed value for the property. 

The deal was an “extremely rare opportunity to acquire a low-coverage industrial asset on one of the best-located parcels of scale in the South Bay, relative to the ports,” JLL’s Nick Foster, who brokered the deal for the seller, said at the time. CenterPoint declined to comment for this story. 

Across Southern California, warehouse, logistics and manufacturing firms that have operated out of their own properties for decades are now selling them, taking advantage of soaring industrial land prices and a seemingly unquenchable appetite from industrial real estate investors and developers. 

In Los Angeles, according to Kidder Mathews, industrial properties have been trading at an average of more than $250 per square foot — a 177 percent increase from the average price of $90 per square foot in 2011. In December, a warehouse near the Long Beach Airport sold for $581 per square foot. 

Often, longtime owners are leasing the properties back, cashing in on the spike in demand but guaranteeing themselves continued use for a certain period. 

“Owner-operators are monetizing their real estate,” said David Wirgler, who works with Los Angeles-based brokerage and lender Stan Johnson Company. “These business owners are not real estate experts.” 

Sale-leaseback arrangements can give industrial firms capital to invest in their core operations, or they could simply be a cashout for owners. 

“The main reason for a sale-leaseback is access to capital,” said Patrick Schlehuber, Rexford Industrial Realty’s head of acquisitions. “It allows these businesses to keep operating and invest in somewhere new or at current facilities.” 

Cashing out 

Northeast of Carson, in the industrial city of Santa Fe Springs, Crown Fence Supply owned its own warehouse for at least three decades before Rexford bought the property in April of last year. 

The 22,718-square-foot warehouse was built in 1956. In 2015, the company spent an estimated $17,000 to replace a roof on the property, according to permits granted by the Los Angeles County Department of Public Works. The property was old and aging — and Crown Fence wasn’t going to put in the money to renovate it. 

Given rising industrial rents, it could not afford to move elsewhere — until Rexford came in with a $16.7 million offer to buy the building. 

“They’ve operated out of the site for a long time, and it’s not very efficient anymore,” Schlehuber said. Crown Fence will invest the money in a new facility in the area, he added. 

In the meantime, the company will lease the facility back for a couple of years. Once the lease expires, Rexford can redevelop the site — it plans to build a two-building logistics facility with high ceilings and then sign a new tenant at market rates. 

Barbara Perrier, an industrial broker at CBRE, called these types of deals “a win-win.” 

A similar deal was in place with CenterPoint Properties and Universal Warehouse in Carson. By selling, Universal Warehouse is saving hundreds of thousands of dollars on property taxes and renovations — money that could be used to grow its business. 

Taxes at the property from 2021 to 2022 — before CenterPoint purchased the site — were estimated to be about $270,800 a year, according to county valuations. 

In 2016, Universal Warehouse spent an estimated $490,000 to renovate interior office space, L.A. Public Works documents show. The company spent an estimated $880,000 a year later to add an extra 15,000-square-foot truck dock and mezzanine level. 

Refinancing pains 

By selling, longtime industrial owners also don’t have to deal with obtaining loans and refinancing for their real estate. 

Ducommun, an aerospace and defense company based out of Santa Ana, has owned its 307,000-square-foot warehouse in Gardena since 1998, when it bought the site’s 17 acres of land for $541,272, records show. 

Over the ensuing years, Ducommun obtained more than $500 million in revolving credit lines and loans from multiple banks, including Bank of America, Wells Fargo and UBS, in connection with the Gardena warehouse and other properties, records and financial filings show. 

Industrial owner-operators aren’t able to pull out 100 percent of a property’s value in a refinancing with a bank. And industrial developers and investors, including Rexford and CenterPoint, often don’t obtain loans to buy the properties, relying instead on 1031 exchanges or cash. 

Ducommun got 100 percent of the Gardena warehouse’s value when CenterPoint Properties stepped up with a $143.1 million sale-leaseback offer in December, records show. 

Sale-leaseback benefits 

Sale-leasebacks are critical to the trend because they give longtime owner-operators such as Ducommun and Universal Warehouse more leverage to negotiate favorable lease terms once they sell. Given how quickly rents across Los Angeles are increasing, industrial tenants often look to sale-leaseback deals to secure better rental rates, according to brokers interviewed by TRD. 

Average industrial rents in Los Angeles rose to $1.10 per square foot a month in the fourth quarter of 2021, according to Newmark — a 22 percent increase compared to the fourth quarter of 2020. In highly coveted markets, like the South Bay, monthly rents are up to $1.60 per square foot. 

In the last nine years, industrial rents have risen by 123 percent, according to Avison Young. 

“If the property is suddenly worth $50 million, the company is not used to paying that [corresponding] rental rate,” CBRE’s Perrier said, adding that the firm will either counter and offer to pay a lower rent, or won’t sell. 

Brokers, developers and investors all agree: There have been more sale-leaseback deals during the pandemic. Most anticipate more to come. 

“Owner-operators find [sale-leaseback deals] a successful alternative to selling their occupied industrial properties,” given the lack of inventory in a market with a vacancy rate of 1 percent, said David Harding, a broker at Colliers. 

Not always a done deal 

Though more industrial properties are now owned by real estate investors and developers, some will remain in the hands of their operators. Even with high industrial prices, some owners refuse to sell. 

An example would be a defense company that has a highly classified facility it has spent millions on, according to Rexford’s Schlehuber. In Southern California, if a company has a property with state permits that allow it to release pollutants into the air, those permits are difficult to transfer to a different facility. 

“The user may keep the property for 10 years, but what happens in 10 years?” Schlehuber said. 

“They don’t want to lose any control.” 

Last year, Rexford bought a highly specialized facility in Rancho Dominguez — an 80-acre oil tank site — for $217 million. The seller was Zenith Energy, which operated the facility as a crude oil storage site. According to Zenith’s website, about 4 million barrels are stored there, with each tank holding up to 21 million gallons of oil. 

Zenith Energy wanted to maintain control of the property for as long as it could, according to Rexford. With options, it will be able to stay there for more than 30 years. 

Rexford isn’t in a rush to redevelop the property. 

“For us, we’re a public REIT, our purpose is to deliver cash flow to shareholders,” Schlehuber said. “By renting it, that’s delivering cash flow.” 

The onus is on brokerages and investment firms to help persuade longtime owner-operators to put their property on the market. 

“We make a lot of offers,” Rexford’s Schlehuber said. “Most of the time, it’s a no.” 

Longtime warehouse and industrial owners are getting a “lot of unsolicited offers,” said CBRE’s Perrier, who represents sellers in sale-leaseback deals. Companies then reach out to CBRE, asking whether the offers are fair or whether they can get more. 

Boats and retirement 

In March of last year, Stan Johnson’s Wirgler brokered a sale-leaseback deal in Simi Valley on behalf of Milodon, a company that makes engine components. Milodon, run by Steve Morrison, sold the property for about $5.5 million, records show. 

Morrison wanted to cash out on the real estate, but keep the business there for up to 25 more years — a provision Wirgler was able to secure in the new lease. 

But Morrison wasn’t focused on moving into a modern manufacturing facility with high-tech dock doors. He didn’t want to open up a new complex or invest the money into researching new engine parts. The motivation was straightforward and reflective of the ongoing generational shift in the industrial market. 

The veteran manufacturer was ready to buy “boats and vacation homes with the money,” Wirgler said. 

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