The industrial market continues its recovery nationwide, driven by tenant demand for more space to accommodate growth and the need for more efficient locations and buildings to reduce costs. As U.S. GDP continues its slow but upward climb, industrial absorption also is growing. According to the most recent NAIOP Industrial Space Demand Forecast, “the U.S. industrial market is poised for significant growth, with annual net absorption forecast to reach 150 million and 175 million square feet in 2013 and 2014 respectively.”
First Industrial Realty Trust has been executing a strategic plan to upgrade its portfolio and position itself for this recovery with a process that began in 2009. The upgrade is being done through dispositions of non-strategic assets as well as through new investments, many of which are coming in the form of new development.
First Industrial’s positioning efforts also have focused on significantly strengthening its balance sheet and lowering capital costs to enhance competitiveness. As a publicly traded REIT, First Industrial has access to a range of capital sources to fund its growth opportunities, including common equity, its credit revolver, and secured financings.
With a current balance sheet that can support approximately $200 million of speculative development at any one time, First Industrial is putting capital to work to meet customer demand and enhance its portfolio with state-of-the-art facilities. The industrial market and the company have come a long way in the few short years since First Industrial launched its first development after the financial crisis of 2008 and 2009.
Developing Customer Solutions in Southern California
When the industrial market began to show signs of stabilizing in the third quarter of 2011, First Industrial saw a unique window of opportunity relating to demand for large (500,000-square-foot or more) distribution centers in Southern California’s Inland Empire submarket. With 40 percent of the nation’s inbound container traffic flowing through the nearby ports of Los Angeles and Long Beach, the Inland Empire is a regional epicenter of distribution and logistics and a bellwether of the economy. During the height of the financial crisis, asking rents had fallen to their depths in this market, dropping to $0.33 per square foot, per month, triple net from their highs of $0.42. As the crisis dissipated, rents essentially recovered. Corporate users such as Restoration Hardware, Living Spaces Furniture, and Ashley Furniture were absorbing large distribution facilities to accommodate growth as they brought in products from Asia. With limited available existing supply and few competitors positioned to deploy capital for new projects, in the third quarter of 2011 First Industrial decided to build a 692,000-square-foot speculative project in the Inland Empire called First Inland Logistics Center.
Harbor Freight, a leading retailer of high-quality tools at discount prices, viewed First Inland Logistics Center as a perfect fit for its expanding business. In fall 2012, Harbor Freight committed to a 15-year, triple-net lease that commenced at the end of 2012. The building serves as a mission critical distribution center for Harbor Freight’s Internet and direct mail business as well as for its expanding network of retail stores. First Industrial built the shell and Harbor Freight designed and constructed the internal distribution and fulfillment features over an 18-month period, meeting First Industrial’s original project underwriting target.
First Chino Logistics Center features 45 dock doors, two drive-in doors, and a wide truck court including double stacked trailer stalls.
“First Inland Logistics Center offered the size, efficient turning radiuses and substantial trailer parking that our client required for their operations,” said Gerald Porter, managing partner at Cresa, Harbor Freight’s broker. “These are rare but in-demand offerings for distribution centers in the Inland Empire market.”
Meeting the Needs of Supply-Constrained Markets
Following the success of First Inland Logistics Center, First Industrial began speculative construction of two additional facilities in Southern California: First Chino Logistics Center and First Bandini Logistics Center.
First Chino Logistics Center is a 300,300-square-foot industrial facility set on 16 acres in the city of Chino in San Bernardino County. In the fourth quarter of 2012, the supply-constrained Chino industrial submarket carried a vacancy rate of just five percent. It is situated in the West Inland Empire at the intersection of the Los Angeles area’s four major counties, Los Angeles, San Bernardino, Riverside, and Orange counties. First Industrial took the site — which already was entitled at the time of acquisition — from permitting to completion in nine months. Building features include the following:
- 32-foot clear height;
- Ample trailer and car parking;
- Early suppression, fast response (ESFR) sprinklers;
- Skylights to harvest natural light;
- T5 lighting with motion detectors;
- 45 dock doors and two drive-in doors;
- A wide truck court with double-stacked trailer stalls; and
- Highway access to six major freeways and proximity to the Chino and Ontario airports.
First Chino Logistics Center’s location on the western tip of the Inland Empire will lower drayage costs for port traffic compared with other Inland Empire locations, as well as offer access to a broad labor pool. First Industrial’s estimated investment in the project is $20 million, including land, development, design, and construction costs.
During the first quarter of 2013, First Industrial signed a long-term lease at First Chino Logistics Center with a specialty beverage retailer and supplier, Lollicup USA, which is expected to take occupancy of the entire building in the second quarter of 2013, following final build out of improvements. Lollicup is leasing the building on a long-term basis and will use the facility as its U.S. headquarters and production, distribution, and service center.
A second speculative distribution facility currently under construction, First Bandini Logistics Center, targets another critical market: the infill South Bay market in Los Angeles, which has limited availability (with vacancy at less than five percent) and growing demand. First Bandini Logistics Center will be a 489,000-square-foot distribution center on 21 acres in Los Angeles County, just five miles southeast of downtown Los Angeles, directly off the I-710 freeway.
The infill site is adjacent to the BNSF and Union Pacific Railway intermodal sites and will provide efficient access to the ports of Los Angeles and Long Beach as well as Los Angeles International Airport. First Bandini Logistics Center will feature:
- 32-foot clear heights;
- 71 loading docks;
- Drive-in doors on each side;
- Ample trailer and car parking;
- ESFR sprinklers;
- Skylights to harvest natural light;
- T5 lighting with motion detectors; and
- Wide truck courts for efficient access.
The building will accommodate companies with expansion or consolidation needs from the proximate South Bay or Central Los Angles areas. First Industrial’s total estimated investment is $54 million; the building is slated for completion in the middle of 2013.
“Our new development projects will enable us to serve customers looking to grow and gain efficiencies in the Southern California market,” said Larry Cochrun, director of development, First Industrial, West Region, and an active member of NAIOP’s Inland Empire Chapter Board of Directors. “The projects also bring jobs to communities and offer logistic designs that help reduce regional truck traffic.”
Upon completion of First Bandini Logistics Center, First Industrial’s Southern California portfolio will total 4.1 million square feet.
East Coast Development Landscape
California is not the only place where demand for new distribution centers is growing. The Central Pennsylvania market continues to attract large corporate users who want efficient access to consumption zones on the East Coast via the region’s efficient highway system. In addition, Central Pennsylvania features a deep, skilled labor force that companies find attractive.
First Industrial therefore is investing an estimated $34 million in First Logistics Center @ I-83, a 708,000-square-foot distribution facility currently under construction. First Logistics Center @ I-83 is situated on 55 acres in York, Pennsylvania. Approximately one mile from I-83’s exit 24, with direct highway access to several interstates and just minutes from UPS and FedEx hubs. The strategically located site provides access to more than 51 million households within a one-day truck drive. First Logistics Center @ I-83 is scheduled for completion in the fourth quarter of 2013. As one might expect, lower land prices are the main reason why a large industrial facility in Pennsylvania might sell for $48 per square foot, which is less than half the cost of a facility like First Bandini Logistics Center, situated in a land-constrained, infill location, in greater Los Angeles.
Energy efficient and environmentally friendly features used at First Chino Logistics Center include T-5 lighting and skylights.
All of First Industrial’s new facilities in the Southern California market are constructed to the state’s California Green (CALGreen) Building Standards Code, which the California Building Standards Commission implemented in 2010 and subsequently updated in July 2012. Meeting the standards of the California Environmental Quality Act (CEQA) requires critical attention to detail.
As an owner, developer and lessor of industrial real estate, First Industrial and its employees share a commitment to advancing sustainable practices. Methods and technologies to reduce energy usage and costs across the company’s portfolio of buildings are reviewed continuously, and environmentally sustainable construction techniques are used to develop and redevelop industrial facilities. Skylighting, energy-efficient light fixtures, drought-resistant landscaping, and recycled landfill materials are just some of the areas where today’s industrial buildings are achieving environmental gains.
In addition to developing new distribution centers in Southern California and Pennsylvania, First Industrial is investing in other new development to enhance and add to its portfolio in key logistics markets. To that end, the company is actively seeking development and redevelopment opportunities in major industrial markets across the United States where the prospects for rent growth are favorable, such as Houston, New Jersey, and South Florida. While new supply is being constructed in the industrial sector, supply remains low relative to historic standards and net absorption levels. Successful development in a recovering economy requires the right team, the right focus and the right capital, all coming together to maximize market opportunities.