DCT seizes the industrial opportunities in the Bay Area and helps shape one of the most important regions of the country.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JANUARY 2016[dropcap]D[/dropcap]avid Haugen is responsible for the Northern California assets of DCT Industrial Trust, a publicly traded REIT specializing in the acquisition, development, leasing and management of bulk distribution and light industrial properties. He also actively pursues the acquisition of existing assets and land sites for potential development in the Bay Area and Sacramento.
Haugen brings over 27 years of real estate and construction experience to DCT Industrial. Prior to joining the team in 2011, he founded Real Estate Development Associates, a company that specialized in investing and developing industrial and office properties within California. Before founding Real Estate Development Associates, Haugen was a senior executive with Panattoni Development Company. While serving in these positions he oversaw all aspects of pre-development, entitlement, construction, leasing and sales on over 7.3 million square feet in over 100 buildings.
[contextly_sidebar id=”lR2jdj2vBPI3Ss5PUplhwDJYUnogkEyh”]TR: How invested is DCT in the Bay Area market? How big of a portfolio do you have here and where is it located?
HAUGEN: DCT is very invested in the Bay Area. We have always had a presence in this market, and a few years ago DCT made it what we call a focus market, causing several things to happen. I was brought on to run the market in 2012, we opened our Emeryville office in 2013, brought property management in-house and hired capital projects and leasing professionals. Our Northern California portfolio has grown 60 percent over the past few years and spans from the San Francisco peninsula, to the I-880 corridor, to San Joaquin County in the Central Valley.
TR: How has the company’s approach to the Bay Area changed/evolved over the years? Has this always been an interesting location for you to invest?
HAUGEN: We have always been interested in the market but have made significant investments in the last few years. In the early days we bought several portfolios that included Northern California properties and managed the assets without having an office here. A few of our senior managers have been active in this market over their careers, so we understood the various submarkets that have always had appeal.
TR: How would you characterize the state of the industrial space in the Bay Area today?
HAUGEN: The state of the market is better than almost anyone in the business can remember. The amazing regional job growth has placed significant demand on most, if not all product types, and industrial is obviously benefitting from this.
TR: What drives the demand for industrial space in the Bay Area, and for that matter elsewhere? Are other regions different in that regard, or are we seeing a national trend occurring?
HAUGEN: By many metrics, the country is doing great and there are metro areas larger than Northern California with higher population growth factors; however, we are the 11th largest metropolitan statistical area in the country with our population growing faster than anywhere else in California. The tech business has had a big impact and, don’t forget, we also have a large agricultural and food component [since] we are centrally located on the West Coast and so close to the fertile Central Valley.
We have two drivers today that were not present in the past cycle: Tesla Motors and e-commerce; both are changing the region and how industrial space gets used. Every business has an online component, and those goods need to be stored. It’s simply a matter of who drives the last mile—it’s either the consumer or it’s delivered to your door.
TR: Is the region in short supply of industrial space? In your estimate how much demand is not being met across our geography? Is that any different from the demand elsewhere across the country?
HAUGEN: We’ve talked about e-commerce and it is the single largest force, locally and nationally, changing the way industrial space is getting used. Users want to be closer to the population centers with growing demand for increasingly faster deliveries. The 30 largest metro areas in the country are growing in this same way. In terms of overall immediate demand, I think we could absorb another six million square feet of space regionally.
TR: You are acquiring and building space in Northern California. That implies that you are still very optimistic about the industry regionally. Why?
HAUGEN: DCT is extremely optimistic in this market and will continue to invest for all the factors we talked about. There are so many opportunities that continue to bode well for industrial space here. Commerce, including the real estate business, is constantly trying to solve the puzzle and make improvements to logistics, and that’s exciting.
TR: Your project in Tracy is a spec development. Tracy has become a darling of a number of large retailers who have recently located distribution and fulfillment centers there. Do you see that demand getting closer to the Bay Area core, or do you feel that Tracy is just at the right intersection of activity and distance?
HAUGEN: The city of Tracy is a great location, and the city leaders understand that. That location is important for two different reasons: first is that a regional player can move around the western states easily from there; and second is that Tracy is the closest place to the Bay Area to build large industrial buildings that can accommodate all industries.
TR: What types of companies are showing interest in your Tracy project?
HAUGEN: DCT’s property is lucky to be located on the I-205 freeway at MacArthur Drive. The building will be 795,000 square feet. This type of great access and visibility has attracted national brands to locate their West Coast operations. We have also talked to users that want a retail component in the building because of its freeway frontage. One user said that if it took the space, its regional management would also be located at the site. It’s great news for Tracy, the region and DCT to attract such high-quality tenants.
TR: What are we going to see in the industrial space development in the near term? What kinds of trends are emerging?
HAUGEN: We already touched on e-commerce; that is real and will continue to escalate growth in our business. Locally, we have what I call the Tesla Effect—which creates a multiplier effect with all its suppliers. We now have other companies announcing the presence of electric and self-driving car operations. The intellectual effort certainly attracts like minds, but the development and manufacturing follows. The San Francisco Chronicle recently pondered if we are the next Detroit. I hope so.
TR: What worries you about the market today, and how is DCT planning for a correction?
HAUGEN: DCT talks internally all the time about market conditions and what we should or shouldn’t be doing. We need to stay disciplined, and we are very focused on investing in the right submarket and the right building size for that market.
It’s [everyone’s job] at DCT to think about what will cause a correction, since every cycle is not like any before it, but the markets are tight, and we haven’t seen overbuilding in spite of the large amounts of capital chasing opportunities.
TR: What are we not asking that we should be asking?
HAUGEN: One question we get asked is the impact rising interest rates will have on commercial real estate. There are many variables in this question. We have strong fundamentals in our industrial markets, and I don’t see anything on the horizon that will disrupt that. The Fed has signaled rates will move up slowly and will remain low for some time and the limited supply of new space will keep upward pressure on rents. Because of those factors, increases in rental rates will more than offset the impact that rising interest rates will have on cap rates. Additionally, the flow of capital into the commercial real estate sector will continue to put downward pressure on overall returns.