Growing mushrooms is tricky business.
The humble fungi need very specific conditions to flourish, and finding those conditions was a lengthy process for Smallhold, a New York-based specialty mushroom grower, when it wanted to expand to Southern California after receiving $25M in Series A funding. Full Spectrum Grow Light
“LA is a hypercompetitive industrial area,” and meant that the organic fungi-growing startup was sometimes vying for space along with more established companies with lots of historical data to show their business works, Smallhold Director of Expansion Curt Harris said.
Most of the buildings Smallhold considered were not food-safe or ready for what they needed to do. The perfect building “probably didn't exist, and if it did exist it might be at a cost that was not feasible to us at the time,” Harris said. “The main thing was, we're trying to get into a new market, build as quickly as we can.”
Smallhold was also having to make a case to landlords to let them make a lot of infrastructural changes to their new space. The mushrooms need a fairly controlled environment with very clean air. Their intensive space upgrades were a hurdle for at least one landlord.
“We were almost ready to sign a lease at this building but the linear feet of concrete that we had to cut to put drainage in was this ultimate barrier – something we just couldn’t get past,” Harris said.
But at last, the company found a former textile mill in the industrial city of Vernon. The 34K SF property was built in 2000 and lacks the bells and whistles of today's industrial properties.
Class-A industrial space is getting fancier and more expensive, and vacancy almost doesn’t exist. The competition for space is intense. Third-quarter vacancy in Los Angeles was 0.9%, among the lowest in the nation and on par with the industrial powerhouse Inland Empire, according to a report from Newmark.
But the crunch has led to tenants examining what they really need from a building and what they can live without.
Class-B and C properties can offer more affordable space, albeit older and lacking shiny new amenities, for those seeking to sidestep heated competition and sky-high prices.
“There seems to be no shortage of smaller, entrepreneurial companies that are attracted to these older buildings,” Lee & Associates — Los Angeles principal Jim Halferty told Bisnow. “They’ll put up with a lot — a lot of warts, so to speak — no parking, low ceilings, tight loading and truck turnaround radius.”
Halferty was involved in the 2021 sale of a building at 3000 12th St. near Downtown Los Angeles to a developer that then turned a third of the roughly 200K SF building into a co-warehousing space called Flex HQ. Co-warehousing draws on the space- and resource-sharing of coworking spaces like WeWork, but for smaller-scale industrial users.
It’s clear from vacancy and rent data that there are plenty of big tenants looking for brand-new, high-ceilinged industrial buildings, but there are many other tenants that, for whatever reasons, might not need all most modern industrial features and are prioritizing cost savings rather than getting into a brand-new facility, Halferty said. Tenants are there for Class-B and C owners that are pricing their properties accordingly.
“These B and C class buildings will lease up at the same clip [as higher-quality buildings] if the price is right,” Halferty said.
The ability to see opportunity in these older buildings has been an advantage for co-warehousing startup Saltbox, which has locations in Torrance and Duarte as well as Denver, Dallas, Seattle, Washington, D.C., and Atlanta.
“One of the appeals of our business model and operations to our real estate partners is that Saltbox can operate within many different types of spaces,” Saltbox CEO Tyler Scriven told Bisnow in September. “We've been able to take Class-B or Class-C, in some cases, light industrial properties that are, in many respects, unattractive to traditional or modern industrial users and turn those into Saltboxes.”
The concept seems to be striking a nerve with investors. This year alone, Saltbox raised $35M in a Series B venture capital round and received a $130M investment from real estate investing platform Fundrise.
Scriven says that his company has been able to take 100K SF buildings with only three or four loading docks or ceilings that are only 12 feet tall — things that would cause most modern, industrial users to hesitate — and get them up and running as Saltboxes.
Los Angeles has a massive industrial inventory, and that means that while not all buildings are going to be suitable for every tenant, there are at least a lot.
“Part of the nature of Downtown is, there are just so many small buildings,” Lee & Associates’ Halferty said. Those small buildings run the gamut — multistory, 100 years old, no parking. For these smaller, startup-type businesses, these could be just what they are looking for.
Some tenants have more trouble than others finding spaces that work for them, “but you usually find something.”
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