Development, Demand, and Process Shifts

By Dennis Kaiser

California developers are facing big challenges and legal changes, which means that the process of bringing new places to life must adjust. Development leaders and respected land use attorneys led a spirited conversation on navigating the future development process at Connect Inland Empire 2016.

The current development market is strong, fueled by e-commerce and logistics occupiers. The “hot” conditions have extended longer than CRE industry leaders expected.

“This is the best cycle any of us has ever had,” says Trammell Crow Co.’s Tom Bak. “Now is the time for a “gut check” to see if “we’re doing a good job to manage our relationships.” Bak believes the timing is right in this” cycle to focus on “building relationships.” That includes getting out in the community and “flipping burgers” as well as taking care of lending partners, as well as his own team.

Hillwood Investment Properties’ John Magness agrees that the Inland Empire is in the “best cycle it has been in in years,” though it will require “adult leadership” on the capital side to continue. He points out that supply and demand are “pretty balanced” now, making it a good time to be a developer in the region, “if you can find land and be patient.”

The Inland Empire market cycle “feels like a triple header” to the Rockefeller Group’s Marc Berg, who says strong demand is helping to offset any challenges. He noted that there are “significant challenges” facing the region. Those are primarily CEQA lawsuits, as unions seek PLA’s, which ultimately “run up hard costs 12% on average,” and can slow down the development process by months and years at a time.

Among the challenges pointed out by Allen Matkins’ John Condas, are CEQA lawsuits, which are becoming somewhat of a “necessary evil,” as well as AQMD regulations, which often times fail to recognize the value of development in terms of quality jobs for the community.

Magness adds that local cities are eager to work with developers, especially since they welcome the jobs. The issue is when “external forces” such as outside agencies step in and create a fight that slows down the cities’ land use process. It makes it “harder and harder” to develop a project, he says.

The City of Moreno Valley’s Mike Lee says the city is finding ways to “facilitate” development, yet be responsible. “We see it as a partnership,” he says. The city has adopted a “holistic approach” to find solutions. The city is even transitioning to an online system that will help streamline the process for developers and occupiers.

An area of growth for the Inland Empire is e-commerce, despite the flat port traffic, says Sares Regis’ Peter Rooney, who calls it the “best market in the country.” An issue he sees is obtaining power for Inland Empire developments, given the belt tightening taking place at Southern California Edison.

It is an advantage for projects that aren’t supplied by Edison, such as those in Moreno Valley, which has its own utility.

The challenges ahead in the Inland Empire are expected to thin the ranks of the development pool, says Rooney. He foresees a time when experienced developers will be competing with “less sophisticated developers who aren’t as effective” or with those from outside the state.

For the time being, Rooney notes there is “no shortage of capital” available for institutional-quality industrial assets in the Inland Empire. Though institutional investors face limited supply, and there’s a thinner lending pool.

The bright spot about all of the development activity in the Inland Empire is the higher caliber jobs being produced by e-commerce and logistics occupiers. Bak notes that skilled labor, which typically pays more than $50,000 annually, is required in the facilities to handle robotics and sophisticated handling systems. “We’re not building warehouses for fork lifts and pallets anymore,” he says. “It’s a robotics business. E-commerce users bring jobs and tax increment.”

Developers have adapted to the shift toward a more business park type of environment for industrial developments too. Though public planning agencies are still coming to grips with lower truck requirements and higher car parking needs.

Lee relates that the growth of the Inland Empire industrial market has spilled over into other sectors. In Moreno Valley, that’s translated into a need for hotels to accommodate corporate travelers working at HQ/distribution facilities, as well as multifamily residences for workers. It has also resulted in a demand for cars. Moreno Valley’s first car dealership in 12 years is opening up.

For comments, questions or concerns, please contact Dennis Kaiser