Controversial AB 98 Could Benefit SoCal Desert Industrial Markets

Industrial owners working in the Inland Empire and further east markets are keeping a close eye on what new legislation dictating industrial development locations means for the areas where they buy, own and develop. 

The law known as AB 98, signed by Gov. Gavin Newsom earlier this year, could push development to less-developed areas and drive up value for projects that already have entitlements, according to panelists at Bisnow's Inland Empire and Desert Markets Commercial Real Estate Summit on Dec. 10. 

AB 98 will play an outsized role in shaping new construction in established markets like the Inland Empire but could also benefit growing industrial areas like the desert markets, panelists said.

“These desert cities that are less developed are really well positioned because they're able to kind of start from scratch in some regards,” Newcastle Partners Development Manager Courtney Wing said during the event at the Hilton Los Angeles Culver City. 

The legislation was introduced less than a week before the end of the session, leaving little time for input or questions from the industry, CRE professionals and organizations have said. Some of the questions surround rejiggering truck routes that some cities may be required to undertake and how that can impact future development sites. In that respect, less built-out industrial markets may have an advantage.  

“I think the desert markets, for a variety of reasons, are well-positioned just because they have a little bit of a blank slate to work with,” Wing said. 

The bill’s impact on site viability also remains to be seen. Sites that have entitlements now may be increasingly valuable as it becomes more difficult to construct new projects, Rexford Industrial Realty Director of Industrial Investments Ryan Leslie said. While that’s a boon to developers with projects in the pipeline, the conditions may also impact who builds these projects in the future.

“I think what we're going to end up seeing is that development in California is going to get continuously more and more institutionalized because it's getting more and more complicated to pursue entitlements” and secure them, Leslie said.  

Another major consideration for industrial in these markets is power. The issue is not new, but as electricity becomes more and more important to tenants, it’s making or breaking deals for landlords. 

“In our portfolio, we've seen ourselves both winning and losing some deals because we either have power or we don't,” Leslie said. 

It is still a slow process, in some cases taking multiple years, to get significant electrical power to warehouses. And in anticipation of increasing power needs to charge equipment and trucks that run on electricity, it is only going to become more important, Leslie said.