Slump Forces Newhall Shift : Development: Amid sluggish house sales, the company appears poised to rely on commercial and industrial operations.
In a good year, housing development is the backbone of Newhall Land & Farming Co.’s revenues. True, the company’s far-flung businesses even include growing avocados, grapes and citrus--a total of 22 different crops--on ranches as far away as Northern California. But selling houses in the planned community of Valencia and selling nearby parcels of land to other developers in the Santa Clarita Valley provided Newhall with 73% of its $238 million in revenue in 1989.
Lately, though, housing sales have been sluggish for Newhall, just as they are for other developers nationwide. At the end of September, the company had only $12 million worth of residential sales in escrow compared to $111 million a year earlier. Newhall’s sales of houses and residential land fell 43% during the third quarter of 1990 compared to the same period in 1989--pulling the company’s total revenues down 34% and profits down 70%.
In times such as these, Newhall has to rely on commercial and industrial real estate operations to prop up sales and profits. And Newhall looks poised to do just that.
After selling about $9 million worth of industrial land in the first nine months of 1990, the company already expects in 1991 to collect $24 million from one big land sale to the U.S. Postal Service, and a total of $22 million to $27 million more from other industrial land sales still in escrow or negotiations.
Meanwhile, only 8% of the commercial and industrial space in Newhall’s Valencia Industrial Center (not all of which is owned by the company) is now vacant, compared with 14% a year ago. And Theresa Brophy, an industry analyst for the Value Line investment service, expects Newhall’s rental income from commercial space and apartments to grow in 1991.
Already, Newhall’s revenue from industrial real estate (mostly land sales) and commercial real estate operations (mostly rents) has become much more important. For the first nine months of 1990, such revenues were $23.8 million or 17% of Newhall’s total revenue, up from $13.8 million, or 10% of the total, a year earlier. Newhall has not yet released profit and revenue figures for all of 1990.
How can Newhall rely on industrial and commercial real estate when the same types of property are behind the troubles felt by banks across the country? “It’s their geographic position,” said real estate analyst Jordan Heller of Merrill Lynch.
Newhall is simply lucky to own a tract of land as big as Manhattan on the expanding northern edge of Los Angeles. Within that tract, Newhall has two main industrial and commercial developments already in use: the Valencia Industrial Center and the Valencia Corporate Center. Newhall’s planned Valencia Commerce Center has not yet been fully approved for development by the county.
Compared to more built-up areas such as the San Fernando Valley, those industrial and commercial developments offer a greater number of large, undeveloped parcels for companies looking to locate large facilities. And although Newhall’s developments are more remote from Los Angeles’ core than the San Fernando Valley, they’re not as far out as Palmdale and Lancaster to the north, where similarly large tracts can be found.
Land in Newhall’s developments is also cheaper than in the San Fernando Valley. According to Bill Farrell, a broker for Grubb & Ellis, a real estate firm, a parcel of land ready for building would cost about $25 per square foot in the San Fernando Valley and about $12 to $15 in one of Newhall’s developments.
Newhall has also insulated itself from the real estate slump by finding land buyers whose development or expansion plans don’t depend on banks, which have dramatically slowed their real estate lending. One example, of course, is the Postal Service. But Donald L. Puente, Newhall’s director of real estate, said three of the companies planning to buy industrial land in Valencia this year are large corporations that will pay cash.
Industrial and commercial land development isn’t important to Newhall just this year. It’s a key part of the company’s long-term plan for its Valencia community. Valencia’s growth and development are intended to be at a gauged rate to prevent the area from becoming congested. Puente said an important part of the plan is to balance residential and commercial development in the area so that Valencia doesn’t become a mere bedroom suburb.
Developing offices and industry in Valencia could also eventually help fuel demand for Newhall’s houses. About 44% of those who work in the Valencia Industrial Center live in the Santa Clarita Valley, said company spokesman Charles L. Cohen. With that pattern in mind, Newhall’s plans call for adding 2,000 jobs to the area each year.
To keep its commercial and industrial development plans on track, Newhall needs to ensure the success of its giant 1,436-acre Valencia Commerce Center as well. When fully developed, the Commerce Center would be bigger than any existing industrial park in the county. The project was tentatively approved by the Los Angeles County Regional Planning Commission in October, but the commission told Newhall to work with neighbors to address complaints by neighboring homeowners. The project will go before the Board of Supervisors later this month.
The anchor of the project will be a Postal Service mail-processing facility, meant to serve northern Los Angeles County. Newhall first announced the $26-million land sale about a year ago. But the company received only a $2-million down payment for the land last year. In 1991, Newhall is scheduled to get two more payments totaling $24 million as it finishes grading and preparing the land for the Postal Service.
The postal facility alone may give a big boost to Newhall’s plans to create jobs in Valencia. When it’s ready to operate in 1994, Newhall spokesman Cohen said, the facility will hire about 2,000 workers.
