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September 29, 2015

Investors in Southern California are converting industrial warehouses to shiny creative office and retail. Here is an exploration of three possible underlying reasons for the trend.

California’s economy and policy

Like the rest of the United States, California took a hit during the recent economic downturn. The recent recession has had a long-lasting effect, particularly on unemployment in the manufacturing sector. “This reality has inevitably shifted some company real estate requirements, causing some of those who didn’t cease operations to vacate bigger warehouses,” says Karina Saranovic, a broker on JLL’s Los Angeles team.

According to the LAEDC’s Institute for Economics 2014 study, although California is still the largest state contributor to national manufacturing GDP, weighing in at 11.4 percent, core aspects of manufacturing took a dramatic turn during the Great Recession. California documented a loss of over 842,000 manufacturing jobs between 1990 and 2012, signaling a decline of nearly 40 percent of all manufacturing employment.

Although many identify the weak economy as the culprit, others blame California’s internal policies and regulations. California has a notorious reputation for unfriendly business practices, namely overly austere regulations, lack of tax incentives and one of the highest tax rates in the country.

These realities have displaced bigger business and deterred some from setting up home base in the state. Toyota’s migration to Texas marks one of the most publicized leaps to date, but similar news has surfaced, including headlines about Farmer Brothers’ new $65 MM North Texas Headquarters, relays Saranovic.

Technology

The internet has revolutionized the real estate market for industrial users. Demand for distribution centers continues to grow in lockstep with skyrocketing online shopping practices. “We’re seeing many local retailers foregoing smaller retail sites and consolidating all operations into larger spaces traditionally only reserved for warehousing,” says Saranovic.

For example, WalMart recently announced their intent to restructure their real estate model. The retail mogul will slowly shut down their mid-sized retail locations, replacing them with smaller convenience stores as well as giant distribution hubs. Their offspring sites will supply clientele with essentials on-the-go, while the large-scale warehouse centers will afford customers the option of on-site package pick up or home delivery. One can easily imagine grocery stores following suit.

Next, the advent of the internet has fostered thriving globalization. With this flattening of the world, many industrial demands have been outsourced to different countries, leaving room for different warehouse use back home.

Millennial culture

Finally, our modern culture has undeniably impacted the industrial world as companies and individuals flock to high ceilings and bow truss.

“For one, Millennials think highly of the office of the future and employers have gladly cut their lease rate by downsizing for the sake of collaboration,” says Saranovic. “Alternatively, it seems like so many Californians are working on a startup or fleeing a corporate job to embark on a new venture. With this, our society has taken a particular liking to co-working space with the idea that cooperation unlocks the creative juices. This approach has ultimately caused tenants to veer away from traditional office space and lean towards industrial-like incubators.”

Moreover, Millennials have become accustomed to expedience and convenience. This resultant expectation of speed and affinity for comfort has triggered 24-hour delivery trends, pushing distribution centers into older industrial buildings.

The upshot of these three forces combined, says Saranovic, is that our generation has consciously decided ditch cubicles and multi-story towers for more open space, and the industrial landscape seems to satisfy this present craving. And, whether explained through economics, policy, technology or culture, the adaptive reuse craze shows no signs of slowing.

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