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Small Firms Eager to Buy Buildings

Commercial Real Estate

Real estate: Demand for industrial space exceeds supply as low interest rates make owning attractive.

March 26, 2002|BOB HOWARD | SPECIAL TO THE TIMES

Small businesses are buying industrial buildings in Los Angeles and Orange counties faster than developers can finish them, creating a hot spot in an otherwise tepid market for industrial space.

The buying binge is primarily the result of low interest rates, prompting scores of small businesses that rented their industrial space to buy buildings in the 5,000-to-30,000-square-foot range. There can be tax benefits for owners as well.

Developers have built and sold nearly 150 such small industrial buildings in Orange County and 100 in Los Angeles County in the last two years, selling most of them before or soon after construction was completed. Businesses buy the small industrial buildings for a variety of warehouse, service and light assembly operations, but relatively few of the buildings are being used as factories.

Whether to rent or to buy is always a question for firms that occupy small industrial spaces, but low interest rates tilt the scales so heavily in favor of buying that the decision is a snap for many small-business owners, brokers say.

"For a 10% down payment, an owner can have a monthly mortgage payment that is less than the rent would be for the same amount of space," said broker John Carver of Colliers Seeley International, the listing agent for Carson Town Center, a new project of small and mid-size industrial buildings.

"Four of the 11 buildings are in escrow and they don't even have roofs on them yet," Carver said, "and two more are close to escrow." The project is scheduled for completion in about four months.

The buildings sell quickly because demand exceeds supply, Carver said. Few small industrial buildings are put up for sale because those who own such properties tend to keep them.

That means most of the action is in new buildings, and developers can count on a ready list of buyers from a broad spectrum of industries, said Jon Marchiorlatti, a broker with CB Richard Ellis.

At a Lake Forest complex called Crescent Bay Business Center, for example, building owners include a residential construction contractor, a glass installation company, a distributor of industrial cleaning goods and a computer service firm.

Among the owners at Crescent Bay is Adam Etemadi of U.S. Glass, a 13-year-old company that installs glass in commercial buildings. Etemadi moved his company into a 4,500-square-foot building at Crescent Bay in January, expanding from a 2,500-square-foot rented space in Laguna Hills.

Owning the building is a safer investment than having money in the stock market, Etemadi believes, and offers advantages over leasing.

"My rent was going up every year," he said. "My fate was in my landlord's hands. Now I have more control."

Financial considerations were less of a factor for Kris Elftmann of Noelle Corporate Communications, a printing and graphic design firm in Santa Ana, who paid about $1million for the 7,000-square-foot building that his company moved into three weeks ago.

"I don't know that we really considered leasing," Elftmann said. "We didn't do as much financial evaluation as some small-business owners because it is part of our family culture that owning is more important."

The Elftmanns spent about $450,000 to customize and furnish the building. "There's no way we could have put that much money into developing this space if we were leasing, even if we signed a long-term lease," Elftmann said.

Creating the kind of building they wanted was important, he explained, because "As entrepreneurs, we spend a lot of time in our building, so this becomes our home away from home."

Buyers such as Elftmann and Etemadi are the reason that small industrial buildings "are more successful right now than any other kind of industrial or office development," said broker Mike Hartel of Colliers Seeley, the listing agent for MK Business Center in Irvine.

Six of the 14 buildings under construction at MK have been sold, Hartel said, and the rest are expected to be sold by the end of April.

All six buildings at Crescent Bay in Lake Forest were sold before or soon after construction was finished, said Don Schisler of Newport Beach-based Coastal Investment Properties, which developed the project.

Coastal has built and sold 32 small industrial buildings in three projects during the last four years, Schisler said, and all 32 went into escrow by the time construction was completed or soon thereafter.

Besides low interest rates, Colliers Seeley's Hartel said, the small-building market has been helped by the conservative outlook of many small-business owners over the last several years.

"A lot of them have been hoarding their cash for the past two or three years," Hartel said, "so they're sitting on a couple of hundred thousand dollars that they can use as a down payment."

Marchiorlatti of CB Richard Elllis said the strong demand for small buildings today contrasts with the slack demand for larger industrial buildings.

"The bigger buildings are still sitting," Marchiorlatti said. Two years ago, buildings of 100,000 square feet and larger were being filled as quickly as they were built, he said, but demand for the larger spaces has cooled with the economy.

"If you were to ask any developer today what he would build if he had a two- or three-acre piece of dirt," Marchiorlatti said, "he'd tell you small buildings for sale. In the 4,000-to-12,000-square-foot range, we can't build enough buildings."

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