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The industrial sector experienced a moment of worry several weeks ago amid the mounting economic and financial sector turmoil. That moment appears to have passed, based on Prologis’ Industrial Business Indicator, which moved back into expansionary territory in April with a score of 56.2, after falling to its lowest level in 30 months for March.

Prologis, too, apparently is feeling sanguine about the sector, tweaking its forecast to a 10% increase in rents for the year, given that there has been 275 million square feet of net absorption and deliveries of 445 million square feet to date.

Prologis’ research also reported that the utilization rate stabilized in the 85% to 86% range, which is considered good for logistics users. The rate averaged 85.6% in the first quarter of this year and was close but a slightly lower 84.9% for April, which translates to an absence of shadow space.

It also found that the true months of supply (TMS) number—the time it would take to absorb available supply at the current demand run rate–increased to 30 months, up five months from the fourth quarter. The markets and submarkets with the biggest construction pipelines should have the largest TMS increases and lead to variations in availability, as well as rent growth, depending on locations.

“Macroeconomic crosscurrents may lead to some delayed decision-making, which could push demand from 2023 into 2024,” Prologis concluded. “The U.S. vacancy rate should drift up to the low-/mid-4% range by year-end, well below the historic average.”

If supply drops off sharply in 2024, it may raise the potential for demand to outpace supply and pull the vacancy rate down to the mid-3% range by year-end 2024. Also affecting the longer-term prospects next year is a 40% drop in construction starts due to increased costs and a lack of financing. Prologis suggests customers may face a narrow window to act as projects get done this year but decrease next year, particularly in highly desired locations.

Some markets are also expected to experience more interim vacancies due to an abundance of speculative space under construction. Such possibilities include Dallas, Phoenix, Savannah and Austin. Beside such markets, vacancy rates may remain below 2019 levels, in part due to the existence of few unleased buildings available.

 

Source:  GlobeSt.

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With the trifecta of idling engines, diesel exhaust and the constant presence of 18-wheelers, industrial outdoor storage operators fight an uphill battle getting their projects approved by municipalities.

But rising demand — and the rising prices that come with it — has motivated developers to find ways forward despite community backlash.

Entitlement challenges, zoning difficulties and pushback from NIMBY-esque neighbors slow the production of IOS properties, causing developers to create strategies targeted at avoiding these pitfalls to get their deals done and meet a ballooning market need.

“The lack of available supply for truck terminals has historically been driven by local zoning ordinances,” said Cresa broker Eric Rose, who is based in Omaha, Nebraska. “Most communities aren’t friendly and won’t really add any more of these locations unless it’s via a case-by-case, special-use approval process, which is time-consuming and costly.”

As the continued growth of e-commerce and a renewed domestic manufacturing sector add pressure to expand trucking to handle increased logistics demand, some developers are striking out and figuring out how to add new capacity. With IOS vacancy rates slipping to 3% in 2022, according to Marcus & Millichap research, the need is clear. And with the high rents and sales prices being fetched by existing IOS properties, ground-up development can offer a significant payday, especially from interested institutional investors or truck carriers.

Earlier this month, Industrial Outdoor Ventures announced plans to turn the Twin Lakes Travel Park in Davie, Florida, 24 miles north of Miami, into a 38-acre industrial service facility. Situated south of Interstate 595, between State Road 7 and Florida’s Turnpike, the ground-up development will include two buildings totaling 227K SF and outdoor storage yards that can hold 280 truck trailers.

“This is another great opportunity for IOV to meet market demand by developing the type of modern facilities that today’s end users require and in a location that has a scarcity of land available for this type of asset,” Industrial Outdoor Ventures Senior Vice President of Development and Acquisitions Eric Johnson said in a statement.

Turnbridge Equities also just picked up a 3.6-acre site in Rancho Dominguez, California, near Los Angeles, in a $25.5M buy.

“The deal, another 2.49-acre pickup in the South Bay, aligns perfectly with our strategic vision of expanding our Industrial Outdoor Storage strategy in port-adjacent, infill and high barrier-to-entry markets,” a Turnbridge executive said in a statement.

In nearby Perris, California, Alterra IOS spent $8.5M on a 7-acre towing yard in early May, with plans to renovate it and reintroduce it as an IOS property with easy access to the busy Inland Empire.

Chicago-based Dayton Street Partners has been busy with redevelopments and plans to create new trucking facilities, one of just a handful of ground-up IOS developments taking place. The firm just finished a 95-acre terminal with 500K SF of industrial space at 5800 Mesa Road in Houston, which is being leased to the carrier Maersk.

The firm also has a 47-acre, 1,000-trailer terminal set to open in Baytown, Texas, near Houston and less than 20 miles from two Gulf ports, set to open in June. The terminal includes a 24-foot-tall, 1,382-foot-long building meant for unloading and reloading truck cargo. In addition, Dayton Street acquired two truck maintenance facilities in Atlanta with plans to renovate and reopen.

“The difficulties of finding appropriate space and building new facilities — often renovating existing industrial or vehicle-focused real estate, such as mobile home parks or underutilized warehouse sites with vacant buildings and minimal need for rehabilitation — means it often isn’t worth it to seek out real estate on the fringes of a market,” Dayton Street principal Howard Wedren said. “Financing has been rocky lately so it is difficult to get access to capital compared to those with longstanding client relationships.”

It is key to find locations near big travel hubs and ports, spots already in high demand for industrial developers seeking storage space.

“We don’t go to the outskirts,” Wedren said. “We’re very much into the high-barrier-to-entry sites. That’s our model, and we don’t deviate.”

High barriers are common for IOS projects. In Long Beach, California, the firm Cargomatic received city council approval for an IOS storage site last month near the busy Pacific port, just overcoming significant backlash by business groups and local leaders concerned about additional pollution from heavy trucks.

“There are no guarantees at the end of the day,” Cresa’s Rose said. “So do you go through a multiyear development process, not 100% certain that you’re going to get those rezoning and entitlements you need? Or do you just bite the bullet and buy the existing facility, and you can activate your service immediately upon opening the facility?”

In the case of Industrial Outdoor Ventures’ project in Davie, Director of Construction and Properties Rob Chase said the firm had good relationships with local leaders. It helped that the older travel park was showing signs of age and wear, and many in town were happy to replace the site with something newer.

Even with the support, it is a long process. Properly and fairly relocating existing residents is time-consuming, and even with the relatively simple construction requirements of these kinds of projects, it will still take 14 months of site work and construction once the site is cleared.

On the flip side, an empty site in Jurupa Valley, California, near the Inland Empire, that Industrial Outdoor Ventures acquired on the precipice of gaining approvals for construction in a portfolio purchase, now has to restart the entitlement process.

Chase said he sees the value of existing and new IOS facilities continuing to rise, spurring more developers to attempt more conversions, but he acknowledged that the process is often difficult.

“Having the right zoning is absolutely critical,” Chase said. “An entitlement process I describe as being long and drawn out is nothing in comparison to trying to change the zoning. That’s even more of a hill to climb. You could easily flip these properties, but pushing, sticking with it through to the finish line, is worth it.”

 

Source: Bisnow

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Bed Bath & Beyond’s recent bankruptcy filing is not expected to impact retail landlords very much, as many have lined up tenants long before Bed Bath & Beyond actually filed its paperwork.

But it will have ripple effects elsewhere, including in some industrial markets, according to CoStar Group’s May 2023 real estate report.

Bed Bath & Beyond leased 6.1 million square feet of distribution centers throughout the country, most of which in large, modern centers built after 2005. About half already are marketed for lease on CoStar.

CoStar believes that some of those distribution locations will fare better than others and attract new tenants. The reason is that there are only three other existing or under construction distribution centers with space measuring 500,000 square feet or greater, also built after 2000 and within a one-hour drive of Bed Bath & Beyond’s largest Las Vegas distribution center. In contrast, its center within the Dallas-Fort Worth metro market has almost 50 such available distribution spaces within a one-hour drive.

At the same time, several other big chains such as T.J. Maxx, HomeGoods and Ross Stores have grabbed up some of Bed Bath & Beyond’s stores, which could necessitate their demand for more distribution centers down the road.

Meanwhile, while Bed Bath & Beyond’s store closures won’t have that much of an impact on landlords, that is not to say that retail itself hasn’t experienced some setbacks in the first quarter, according to CoStar.

In the first quarter, leasing volume for the retail sector slowed by 2% when comparing quarters and 26% in comparing year to year activity, due to the uncertain economy and absence of available spaces. Altogether, retail tenants occupied 13.2 million square feet on a net basis, which accounted for move outs. This represented the slowest level since 2020 but the ninth consecutive quarters of net demand growth.

Retail property sales also fell—by 40% quarter to quarter and almost 50% year over year due to higher interest rates affecting deal flow adversely. Falling prices have not declined enough to encourage investors to step in.

 

Source: GlobeSt.

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The Live Local Act will significantly change how real estate is developed in Florida, Miami land use attorneys said at a recent webinar.

Held May 4, the webinar was hosted by Bilzin Sumberg partners Anthony De YurreSara Barli Herald, and Carter McDowell. During the hour-long event, the attorneys urged developers to gather with their teams, consult with municipal planning staff, and take another look at their planned projects.

“This opens up a whole area of potential development that was not there before,” said Herald, who specializes in affordable housing and tax credits. “There are a lot of changes. This is probably the most significant land use change in decades.”

De Yurre, who specializes in zoning and complex land use, added “This is the Magna Carta.”

Also known as Senate Bill 102, the legislation was signed into law in late March, effective July 1. Among other things, the bill grants developers the ability to build the maximum amount of units a local jurisdiction allows – and at the maximum allowed height within a mile of a project’s site – on almost any property zoned commercial, industrial, or mixed-use. And that developer can obtain those rights without a public hearing.

The catch is that 40% of those units must be reserved for households earning up to 120% of a county’s area medium income (AMI) for the next 30 years. (A developer can seek the same rights with just 10% of the units reserved for affordable housing, but that will require approval from the jurisdiction’s elected body.)

In addition, SB 102 does not destroy other zoning rights reserved by states such as setbacks and parking requirements. However, the law states that cities and counties must consider reducing parking requirements for affordable projects built within a half-mile of a transit stop.

Besides zoning variances, the code grants developers property tax breaks if they constructed or substantially rehabbed a building in the past five years in which at least 71 units are affordable housing. If those units are reserved for people who earn between 80% to 120% AMI, the landowner is entitled to a tax reduction of 75% for those apartments. If the units are for households earning below 80%, a landlord can secure a 100% reduction on a property tax bill. The catch is rents must conform to HUD rent income restrictions or 90% of an area’s market rate, which ever is less, for the next three years.

 

Source: SFBJ

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As with so many areas of real estate, there was an operational and profit high during the last few years that was like an industry getting drunk and then waking up with a headache.

Looking back can create regret, but here are some things that MSCI in its Q1 2023 U.S. Industrial Capital Trends Report suggests are easy to underestimate.

1. Immediate Comparisons Are Unrealistic

Would you compare a little kid running around with a blanket tied around the shoulders like a cape to an actual superhero? Of course not. Nor would you reasonably undergo a once-in-a-blue-moon experience and then expect that should become an everyday event. That is the difficulty in looking at typical year-over-year business comparisons in industrial.

“Industrial deal volume hit a record high of $40.6b for any first quarter in 2022,” MSCI wrote. “The next-highest first quarter period was in 2020 when $34.4b traded. Any comparisons of the current quarter to these record high points for the market are going to look harsh. In truth, the market simply slipped back closer to a normal level at the start of 2023.”

According to MSCI’s analysis, average first quarter deal volume from 2005 to 2019 is $11.2 billion. This year’s Q1 transaction volume fits in with the past.

2. The Industry Was Already Gearing Up For Higher Rates

“It can be difficult to think in terms of anything aside from Covid given the collective trauma experienced, but back in the fall of 2019, investors began to adapt to a rising rate environment,” the analysis said, remembering that concerns about rates existed before the pandemic.

CRE professionals attending industry conferences at the time were concerned about the Federal Reserve tightening its balance sheet. But it had been more than a decade since the Global Financial Crisis. Realistically, how long would the Fed put off cleaning its inflated balance sheet?

“Investors wanted to focus more on asset types that had low capex relative to the NOI for a rising interest rate environment, and the industrial sector matched this need.”

3. Investors Were Under-Allocated

The MSCI report suggests that investors hadn’t allocated enough of their capital to the industrial sector. This was true for multifamily, as they reported in a separate publication.

“It is not yet clear that investors have the allocations that they desire as there are many moving parts in place. But with the RCA CPPI for industrial slowing to only a 3.3% gain from a year earlier and volume back to average levels, one might make that case.”

4. Cap Rates Are Up, But Not That Much

One of the stories floating around is the return of cap rates. They are up some, but that’s in comparison to the depths they visited in 2022. Cap rates are nowhere nearly as high as pre-pandemic levels.

“The RCA Hedonic Series cap rate reached5.5% in Q1 2023, up from a low of 5.2% seen in Q1 2022 before interest rates surged. Cap rates have increased only 30 bps in a time when the 10yr UST has increased 170 bps.”

 

Source: GlobeSt