Developer Looking for a Special Market Niche

The secret of being a successful industrial developer may be as simple as finding a niche in the market.

Of course, it is anything but simple to identify this market niche in the fiercely competitive California market, according to William Blair Armstrong, resident partner for the Southland for O’Donnell, Brigham & Partners, Costa Mesa.

The hottest market for some months has been distributive and low-tech manufacturing, both with limited office space, he said. Much slower to lease are higher-end high-tech structures.

He cites recent leases like 75,000 square feet for Stanley Tool in the firm’s Rancho Cucamonga distribution center and 72,000 square feet for Daihatsu in the Los Alamitos Corporate Center to support his thesis that distribution and manufacturing is taking up the slack from a slow high-tech market.

Started With $50,000

“The Stanley lease consolidates Southern California Stanley units with the relocation of a Detroit one, while the Daihatsu lease is for the assembly of Japanese-made golf course maintenance vehicles,” Armstrong said.

John O’Donnell, who started the original partnership in May, 1972, with a $50,000 investment, said the biblical seven fat years really lasted almost a decade and have been replaced by the lean years for most industrial developers.

In the decade and a half since, the firm--usually in joint venture with such hard-headed financial partners as Metropolitan Life Insurance Co.--has developed about 14 million square feet of space. It has retained 80% of this space, O’Donnell said.

“During the boom years a developer could count on three certainties or monopolies as I call them,” he said. “Land was going to appreciate in value, the developer with a building in place had the advantage and construction costs were increasing at the rate of inflation or higher.

Verities Have Changed

“None of these verities are operative today. In today’s market, land may have less value next year than it does now, a building built next year can cost less than one in place and because of disinflation, labor and construction costs can and probably will decline.”

The secret for success in industrial development, O’Donnell said, is to find another monopoly, find another niche. This is what O’Donnell, Brigham & Partners has done in the Irvine Spectrum, in joint venture with the Irvine Co.

The 2,200-acre Spectrum project, in the southern part of Irvine at the junction of Interstates 5 and 405--the Santa Ana and the San Diego freeways, respectively--is an effort by the Irvine Co. to create a major industrial base in a part of Orange County that lacks such a base, O’Donnell said.

Part of this strategy is for the Irvine Co. to reduce the value of the land from a $10 to $13 per square foot range to something on the order of $7 to $8, he said. The effect of this reduction is to lower the return on investment, since this return is figured as a percentage of the land costs plus the building costs, O’Donnell added.

Change of Land Use

“This is acceptable to the Irvine Co. because it wants to build industrial buildings, for the most part, rather than glut the market with more high-tech/research and development space,” he added. “We’re planning on building a million square feet of space in the Spectrum.”

Another niche that O’Donnell likes is redeveloping land in communities by changing the use. The was done by competitor Trammell Crow Co. in City of Commerce and is being done by O’Donnell, Brigham in the nearby city of Santa Fe Springs at the Heritage Corporate Center.

The 67-acre mixed-use industrial center has 433,000 square feet available in its first phase, with 176,000 square feet leased. More space is planned. The site was full of abandoned oil wells and covered with hardened drilling mud, an unsuitable base for construction, O’Donnell said.

“The city of Santa Fe Springs granted us a 75-year participation agreement that provides a steady stream of profits from a site that was a wasteland,” he said.