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Looking for Industrial Space? The Squeeze Is On
Rya Hazelwood

Looking for Industrial Space? The Squeeze Is On

By John Salustri

The Industrial market nationally “continues to be the darling of commercial real estate,” reports JLL in its Q2 2021 Outlook. “On the leasing front, things are moving so quickly that buildings are not sitting idle or vacant for long. Availability in the market is extremely tight, with all time low vacancies and new market-high rents.”

https://www.us.jll.com/en/trends-and-insights/research/industrial-market-statistics-trends

Compared to the current woes of the office or retail sectors, that’s good news for landlords and investors. For corporate occupiers, well, not so much. “We’re finding it very tough to find industrial sites,” says Brian Morgan, director of Global Corporate Real Estate for Linde Inc. in Danbury, CT. “Large industrial warehouse activity is very hot. Major consumer providers are buying up a lot of property to build gigantic distribution centers. And that's driving up the prices and taking out large swaths of usable land.”

Indeed. JLL puts Q2 rents at $6.62 per square foot, calling this “the highest on record,” representing a 5.1 percent increase year -over-year. Vacancies on a national basis were also breaking records, clocked at 4.8 percent. So tight is the market overall that users who a few years ago wouldn’t give B space a tumble are rethinking their strategies. 

Of course, what constitutes class A or B “is subjective,” says CBRE’s John Morris, executive managing director and head of industrial and logistics for the Americas. That said, “the delta between pricing and cap rates for class B product has been gradually compressing, 

“It’s an asset with a lower cost basis that can get better rents than ever before,” the Miramar Beach, FL-based Morris continues. As a result, the math is different from what it was prior to the pandemic. “For an occupier, the opportunity to save occupancy costs by moving your requirements from A to B just isn’t the same as it used to be.”

  

From Broadbased to Focused
Of course, the national picture changes when the conversation becomes market-specific. Different, but not a whole lot better.

“Are you looking for class B in an urban/suburban/exurban area or class B in very rural areas?” asks Samantha Turner, the Seattle-based senior real estate manager for Weyerhaeuser Company. The latter markets are helpful for the temporary storage of materials staged for “massive capital projects. We’ve been able to work out deals with some smaller local landlords and get some attractive pricing,” says Turner, who’s firm holds more than 50 distribution and mill sites in its portfolio. 

The story turns as you get closer in, where “it’s a challenge,” she says, in terms of everything that matters: pricing and availability of space. CBRE’s Morris notes that the closer in you get, the “subjective” nature of B kicks in, because asking rents approach those of A assets.

 

Supply Chain’s Impact
The staging of raw materials is an issue all IAMC members are dealing with to one extent or another. “We’re looking now at building out a 150,000-foot warehouse, which two years ago would have cost $60 a foot or so,” says Morgan, who manages some 850 US sites across six business units. “Now it’s double that, and it’ll take three times as long to complete because steel is so far backlogged. It’s even causing angst among contractors.”

Turner agrees. “GCs are scared to death about giving a proposal because numbers are changing on an almost hourly basis,” she says, “and I don’t blame them. Raw material prices have skyrocketed, permit fees are going up and codes, such as the National Electrical Code, are changing so that if you touch a light switch in a tenant improvement (TI) you have to upgrade them all.” 

Her advice is twofold: “Don’t prepare a renovation budget based on history. Too many numbers are changing.” Second, choose your contractors and consultants wisely. “You need a partner. Right now especially, you want to make sure you have a seasoned architectural firm on hand,” if for no other reason than to stay ahead of those changing permitting and code requirements. Choose incorrectly--especially on projects in multiple regions, and it filters right down to cost, time and frustration.

 

Legacy Assets Can Justify Their Existence
Just like you’re sure to find loose change in the folds of your living room couch, most corporate IAMC members, unless they can boast a wire-tight portfolio, have some outdated assets in their holdings, possibly outmoded by time and structure or subjected to brownfield issues that have rendered them B at best.

Happily, Samantha Turner reports that, in her talks with other IAMC members, they have taken ample opportunity to reduce the overhead of legacy properties, especially since the previous recession--the so-called Great Recession of 2008 and 2009. The play-by-play was similar among members, she says:

“It’s so much better than it was 10 years ago. In the midst of the recession, there wasn’t as much other activity going on, so we had the opportunity to clean sites up and get them off our books. Like a lot of members I know, we took the time to manage those legacy assets. I don’t worry about it now nearly as much as I would have 10 years ago.”

Morgan’s history with legacy assets parallels Turner’s. “It comes down to data collection and discipline,” he says. “You start with all the detailed data--how much are you paying every year in taxes and maintenance? What’s the market condition? What’s the environmental condition?”

That last can be the trickiest question, in part because of the potential changes in city and state environmental laws. “A site that 10 years ago may have been below the acceptable threshold,” he says, “may all of a sudden need to be remediated because municipalities have lowered their thresholds.”

Buying properties is always more fun than selling them, says Morgan: “Selling takes time and energy from both the corporate real estate team and the local business unit. Having a strong team, including really good environmental and legal consultants, is key.”

Of course, there are other ways for dealing with legacy assets. “Consider a sale-leaseback,” says Morris. “There’s so much capital chasing industrial right now, there’s virtually always someone ready to take an old asset off your hands.”

The sale-leaseback will accomplish two things: It will take the property off your books and, even if you’re not ready to dispose of it, the lease term can give you time to decide the best path to “phasing it out of your portfolio,” he says, “while the new owner gets that period of cash flow.”

And remember: “Prices are setting new records almost every day,” he concludes.  

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