Tag Archive for: industrial real estate market

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Inflation, Interest Rates And The Industrial Market

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Pesky, lingering inflation that is higher than we’ve seen in years, along with six interest rate hikes totaling 375 basis points since the beginning of the year have had varying degrees of impact on all sectors in commercial real estate.

The speculation of further hikes later this year and in early 2023 doesn’t help.

Industrial real estate remains one of the darling sectors, though it is being tested by current economic conditions.

Four industrial real estate professionals, including owners, investors and brokers, three of them based in Chicago and one based in Houston, participated in a roundtable discussion, giving their perspectives on inflation, interest rates and industrial real estate. The participants: Alfredo Gutierrez, Founder, SparrowHawk; Rick Nevarez, Director of Acquisitions, Clear Height Properties; Kelly Disser, Executive Vice President, NAI Hiffman; and Hugh Williams, Principal and Managing Broker, MK Asset Brokerage.

What are the implications of the five 2022 rate hikes on transaction/acquisition activity?

Alfredo Gutierrez: It’s a challenging time as there are more investors stepping to the sideline. This means that if you are selling an asset today you might get three or four offers versus a dozen one year ago. On the  buy side, if investors have cash or lines of credit tied to a low rate, they are utilizing their resources. The fundamentals on the income side of the equation, because of rent growth, are still strong—that’s factual. Some are putting down their pencils because they are concerned about the potential for a recession and whether we’ll see the same levels of rent growth.

In reality, cap rates are a function of how much capital there is to invest into something. The question is how much dry powder remains on the sideline. We’re seeing an erosion of capital on the retail side and people starting to get squeezed. However, banks, life companies and institutions still have capital to place, and I believe it will flow into industrial.

Rick Nevarez: Activity has slowed, but it hasn’t come to a grinding halt. Overall, we continue to see deal activity and are expecting a big fourth quarter. It’s like airplane turbulence:  some respond with white-knuckle gripping of the arm rest while others acknowledge it’s taking place and go about their business. It’s really a matter of understanding the fundamentals of the real estate and how the current economic environment impacts those fundamentals.

Kelly Disser: It’s an interesting time with different groups being impacted in different ways. Owner occupants, private investors, institutional investors—all have acted or reacted differently. The demand for industrial space and leasing absorption today is still very strong. Inventory/vacancy is at an all-time low. As a result we’re seeing rent growth like we haven’t seen before. In certain underwriting acquisitions, we are seeing the impact of interest rates on values somewhat mitigated by rent growth and rents trending even higher than what we see today. The equation is evolving.  The development and investment sales markets have reacted and adjusted. Those with large funds have the ability to remain active and aggressive—and they are distinguishing themselves. Investors/developers who are sourcing capital on a deal by deal basis may be having issues in the current environment.

Hugh Williams: There was a point this summer when large institutional investors essentially said, “pencils down on all deals,” unless it was a perfectly placed asset/tenant combination in the middle of the fairway. Investors and developers are proceeding with haunting caution because at some point the math does not work.  You cannot acquire an asset when you underwrite debt costs that are greater than your projected return. That is problematic.

But we need to remember we’ve been in a low-rate environment for a long time, an environment that couldn’t last forever; and there are geopolitical events taking place that are also important considerations.  I have heard people say they are pulling back but some of them aren’t sure why. Overall, leasing activity is quite strong, and things are still moving forward particularly in select markets and micro-markets.

How are the rate hikes changing the flow of acquisitions and dispositions, if at all? And are they impacting different size buildings differently?

Nevarez: Interest rate hikes have pushed some buyers and sellers to the sidelines. But we are still buyers, looking at a variety of opportunities including value-add acquisitions. Sometimes you have to tweak underwriting to have a deal pencil out and make sense. Now more than ever, you need to understand ALL elements of the transaction, and what is motivating buyers and sellers.

Gutierrez: The effect based on size is really a case by case situation. But in general, if you had two assets where essential building characteristics except for size were essentially the same, the smaller asset would feel the pinch more. While smaller buildings are more likely to have shorter term leases, it will depend on the tenant roster and the lease terms. At the same time, because the rent roll may turnover more quickly, smaller buildings may be able to adjust pricing more quickly, too.

Disser: Interest rate hikes are impacting the flow of acquisitions and dispositions. The  pace has slowed in the second half of 2022 from what we saw the prior 18 months. But it is all relative, the first 18 months coming out of covid we saw activity levels, values and rents not seen before—in Chicago and across the country. An adjustment was needed.  There was simply too much money chasing too few assets:  the definition of inflation. Impact varies from case-to-case, according to location, submarket, or quality of asset.

Williams: My hypothesis is that if you go to a smaller, non-institutional building, it’s generally a different type of buyer, with a different mentality. For example, an operator like Blackstone is taking the long view. They are likely focused on main and main locations. When they go to build, they are focused on operating their platform as a business, not necessarily the conditions of the moment or focused on a near to short term exit. Smaller owners may be at greater risk—real and emotional—based on being prisoners of the moment (as we all are).  The short stroke is big boats are better ballasted against storms. Small boats get tossed about.

In other asset classes—like office and multifamily—some say that activity has slowed as the market looks for a re-set. To what degree is that occurring in the industrial sector, and are there other considerations (i.e., size, etc.)?

Nevarez: It’s really hard to say that any asset class is recession-proof, but industrial certainly is close. If the market was overbuilt, the impact might be different. There may be a scaling back and slight reset of pricing, but it’s not the same as other sectors because demand has been so strong. Our portfolio, for example, is 96% leased due to lack of product in the markets we own and operate in.

Gutierrez: A lot of people have put pens down, so to speak. Unless you need to place capital, you won’t. With some of the overall questions that exist, and fewer offers to consider, there isn’t necessarily a lot of pricing clarity. As 2022 wraps up our volumes will be down, particularly for the second half of the year.

Disser: It is always dangerous to generalize. The idea of a price reset isn’t absolute in industrial, as it may be in other sectors. In the industrial sector I think value equations are evolving, given rent growth. We see absorption, leasing and rental rates continuing to increase. The user/occupier clients of mine generally are operating businesses that are still strong and eyeing expansion.  In addition to scrutinizing interest rates, many are watching how lenders behave—as many have slowed loan origination activity. For some groups, the ability to secure the capital for a project in some cases is as much of a question as the cost of the capital.  If you lose your equity partner or can’t get a loan—you’re out.

Williams: There is a group that has been waiting 5-6, 10 years for a reset! The sky is continually falling.  Say it long enough and eventually you will be right. Pricing may fluctuate from its peak, but I don’t anticipate an incredible swing. The reality is that developers are much more rational today and have been that way for the last decade. What is going on in the interest rate environment forces additional austerity measures onto industrial developers.

All of the various elements at play lead me to believe that the sky will not fall, maybe a little rain, but rainwater is one of the keys to life—ask California.

How are higher interest rates impacting user sales/acquisitions? Are the higher rates making them any more or less likely to look at renting versus owning?

Nevarez: Higher Interest rates make it harder for users to come up with the capital to purchase an asset. Most users would rather place their capital in their actual business operations (machinery, employees, etc.).  Current owners may also look at their overall business plan to determine where they may need additional capital and find creative ways on how to get that capital. They look at their actual real estate as an opportunity to raise capital—through a sale leaseback—and to Clear Height (landlords) as a way to get that capital, creating a win-win situation for both parties.

Gutierrez: One of the factors that pushes users to consider an acquisition is the upward trajectory of rental rates. They figure they might as well buy. But in the current interest rate environment, the cost of ownership—if there was an inventory of buildings for users to buy—is up as well.

While there are concerns across the industry about interest rates, inflation and their overall impact, Alfredo Gutierrez suggests that the potential for stagflation would be worse. “If the Fed is going to push us into a recession, put us there and make it short-lived.”

Disser: Everything is getting more expensive across the board; that is why inflation is so crucial at this point in time. I don’t believe the increases in interest rates have impacted user sales whatsoever.  The most limiting factor is just availability of space or available options that could be purchased.  There is virtually no inventory. I have clients who want to sell their buildings—they need more space—but have no where to go; because there is nothing larger for them to buy.   Clearly the higher cost of funds results in larger interest payments, but the demand and growth seems to be greatly outweighing borrowing costs.

Williams: Not everyone needs to own a home, not everyone needs to own industrial real estate. Unless there is a specialized need, most operators should probably focus on their business and not try to get into the real estate game. The other consideration is that because of the overall tightness of the market, it’s hard to make a move—hard to buy a building. For many owner-users real estate is as emotional as it is practical.  Those that really want to buy will find a way but my supposition is that things slow on the user front because higher interest rates also affects the entire supply chain of activities within a warehouse as much as the cost of acquiring that warehouse.

 

Source: REjournals

Industrial Revolution Continues: ‘Ongoing Boom’ Draws Out Latest Crop Of Newcomers

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It’s rare for a property type to extend a growth cycle beyond a decade. But industrial real estate’s dominance only seems to grow — attracting newcomers while big players scrap for the materials and land they need to keep their projects moving and potential clients happy.

While longtime powerhouses like Prologis and Panattoni plow forward with their own mammoth projects — and Amazon admits that it has too much industrial space on its hands — other companies are making their debut, hoping to seize on some of the continued demand and expanding yields.

Although the industrial market has been on an expansion trajectory for years, there seems to be plenty of room for newcomers.

“It’s no secret why industrial is doing so well, with the e-commerce boom really accelerated by what’s happened in the last couple of years with the pandemic,” said Scannell Properties Director of Development in Southern California Jay Tanjuan. “People were almost forced to order online, and many realized how convenient it was. E-commerce has huge demand, and so there’s the need for warehouse.”

There seems to be widespread consensus that the industrial heyday is far from over.

“We’re in an ongoing industrial real estate boom. We had been in an above-average growth phase pre-pandemic and obviously, the pandemic accelerated that. Post-pandemic, it continues to grow,” said RBC Capital Markets Director Michael Carroll, an analyst who covers Prologis and other REITs. “I don’t think we’re at the end of it, it’s still ongoing.”

Carroll pointed to the nationwide vacancy rate for industrial space — 3.3% in the first quarter, according to Cushman & Wakefield, with lease rates up 15.2% on average compared to a year ago — and a rapid pace of leasing that means new spec development is snapped up as soon as it’s finished, if not before.

Among the industrial newcomers is Peterson Cos., the Virginia-based developer of residential communities, huge retail districts and data centers. Peterson took the plunge into industrial development last year, and has two projects totaling 334 acres underway in the Washington, D.C., area, with another 915 acres in the planning stages, according to Peterson President of Development Taylor Chess.

“We started looking at industrial eight to 10 years ago, seeing that as the wave of the future,” Chess told Bisnow. “We felt as though distribution was going to become a much more integral part of the retail market. But we kept getting beaten out by people buying land for data centers, so we pivoted to data centers.”

Now, as the company’s initial prediction proved out, hastened along by the pandemic, Peterson doubled down on its efforts, launching an industrial arm in earnest to capitalize on the staggering demand.

 

“There’s no question that internet sales and distribution were going to become a key industry eight years ago, and that’s why we started teeing it up. We had no idea it was going to accelerate as fast as it did,” Chess said.

Peterson’s not alone. Nationwide companies that have operated successfully for decades in other property types are also diversifying their efforts by turning to industrial.

South Carolina-based Greystar, for example, is a bastion of multifamily development and management, with thousands of units in major markets across the country. But Greystar in March paid $43.7M for 154 acres near the Phoenix airport, setting up the company’s first large-scale industrial project. Greystar got a leg up on its foray into a new product type by purchasing a parcel with plans that were already approved by the local planning authority. Greystar will work with a development team assembled by the former owner of the land, a Phoenix-based company called Unbound Development, according to a press release announcing the deal.

Similarly, private equity giant KKR & Co. earlier this month announced a dramatic push into industrial development, with plans to build 1.8M SF worth of mid-sized warehouses in last-mile distribution locations in Atlanta, Dallas, Denver, and Orlando, Florida.

And Tishman Speyer, known for its office buildings, hired Andy Burke, formerly of industrial developer Terreno Realty Corp., as its managing director to oversee industrial acquisitions and development. Tishman Speyer in December 2021 announced that it acquired two middle-mile distribution centers in Colorado and Pennsylvania.

Each of these new entrants to the industrial market appears to have a focus on last-mile distribution, which is basically the white whale of industrial development right now, according to Carroll, thanks to its demand paired with a lack of available land.

“Companies are trying to build industrial warehouses close to consumers because it reduces shipping costs and labor costs,” Carroll said. “It’s important to be as close to consumers as you can, but most cities don’t want industrial warehouses because they want the highest value for their tax base and the least traffic. It’s hard to build industrial warehouses where they actually need to be.”

The lack of available land is something about which Chess at Peterson knows a lot.

“This has never been an industrial market, it’s always been a government market,” Chess said of his company’s target market around the nation’s capital. “Zoning is a challenge, as well as finding large tracts of land. Many other areas have large industrial sections of their metro area that have already been designated or are being redeveloped from manufacturing. D.C. doesn’t have that, so finding the right location has been a challenge.”

Land availability is just one of the challenges for any company trying to develop industrial properties right now. Shipping delays and turbulence in markets and foreign countries continue driving up the cost of materials, and labor is difficult to find in most markets. This doesn’t just make buildings cost more, it impacts a key factor for potential industrial tenants: speed to market.

“The biggest issue with leasing is that when tenants enter the market, they want it now. That is the biggest issue. The tenants are there, but we have to finish building to be able to put them in. That’s why going spec is so important,” Chess said.

With so much competition for land, materials and labor, the addition of new players to the marketplace could be considered a negative for existing companies that are already battling to get what they need.  But Tanjuan says that for those who are committed to the product type, there’s a way forward.

“There are opportunities out there for everybody,” Tanjuan said. “It’s competitive, and finding space is extremely difficult, but there are opportunities out there. If you’re out there and being proactive, you’re going to run into something.”

 

Source: Bisnow

Another Big Year Expected For Industrial Real Estate In 2022 — But Development May Be Stymied By Supply Chain

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The U.S. industrial real estate market will continue to be on fire heading into 2022 but longer lead times to obtain construction materials and across-the-board price increases will also affect the sector.

Cushman & Wakefield PLC took a two-year look into the future, predicting industrial absorption from the start of 2022 to the end of 2023 will be 855 million square feet. Although demand will be high, and issues will make new industrial development challenging, Cushman expects new supply will slightly outpace demand in the next two years, which’ll help moderate the market somewhat.

Cushman is predicting new industrial deliveries will reach 932 million square feet in 2022 and 2023. E-commerce is a big reason — but not the only one — behind the warehouse sector’s massive growth since the pandemic. Online sales rose to 21.6% of total retail sales in the second quarter of 2020, compared to 16.2% in Q1 2020, and remain around 20% as of Q3 2021, according to CBRE Group Inc. (NYSE: CBRE) research.

“2021 was the best year ever for industrial real estate,” said James Breeze, senior director and global head of industrial and logistics research at CBRE, during a recent forecast call with reporters.

Third-party logistics have dominated industrial deal activity this year, a share that could grow in 2022 as costs continue to rise, and space and labor becomes more challenging to find.

“Many retailers or wholesalers will outsource their distribution to 3PLs at a greater clip in 2022,” Breeze said. “This outsourcing is going to be prevalent throughout the country.”

CBRE is forecasting vacancy rates next year for warehouses to remain at or even below 3.6% in 2022. Cushman is predicting industrial vacancy in North America will end 2023 at 4.1%. Expect rents to continue to rise for industrial occupiers, too. Cushman is forecasting average net asking rents for warehouse space in North America will reach a new high of $8.72 per square feet by the end of 2023.

“Even with the rental-rate hikes, tenants need warehouse space so much they’re willing to pay the new rates,” said Erik Foster, principal and head of industrial capital markets at Avison Young USA Inc.

“In fact, transportation costs are a bigger concern for many groups leasing warehouse space,” Breeze said.

Real estate costs are typically only 3% to 6% of total logistics costs, compared to 50% for transportation. The cost to ship goods via ocean freight grew more than 200% in 2021, while domestic-freight costs jumped more than 40%, according to CBRE.

 

“Leasing more space may actually save some occupiers money, if they are able to use additional facilities to cut down on domestic or international transportation,” Breeze added.

Investment activity for industrial real estate is expected to remain hot in 2022. Since the pandemic, some capital sources have pivoted away from uncertain asset classes, like retail and office, and instead poured money into industrial and multifamily, both of which have been on a tear in 2021.

Capitalization-rate compression across several U.S. markets has been observed in 2021 and is expected to continue, but cap-rate spreads between primary and secondary markets will be observed, CBRE predicts.

CBRE is predicting Phoenix and Las Vegas will post cap rates in line with the Inland Empire, about 3.1% in the first half of 2021, in 2022. Prices in the Pennsylvania Interstates 78/81 corridor are expected to be closer to those seen in New Jersey industrial markets, about 2.9% in H1 2021, says CBRE. Northern and central Florida could approach cap rates observed today in south Florida. Miami industrial real estate saw cap rates averaging 3.75% in H1 2021.

“With the amount of investor interest in industrial right now, there are some groups that don’t have much experience owning or operating warehouse real estate,” Foster said. “We’re seeing folks that are sophisticated, with real funds behind them, move in like never before to an asset class that they don’t know that well, which can cause risk.”

 

Source: SFBJ

Expert Roundup: Brokers Discuss Industrial Real Estate

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Since the pandemic started affecting the U.S. economy last March, industrial real estate has proven to be the bright point in an otherwise challenging real estate market.

As part of CommercialCafe‘s Expert Roundup series, a number of commercial real estate experts from across the country give their takes on why the industrial asset class is so resilient, what challenges it still faces, what the near- to mid-future has in store and even break it down to a regional perspective.

Industrial construction projects in the U.S. are projected to eclipse 342 million square feet in 2021 – the highest in five years. What are the main drivers of this expansion?

Grigoriy Azayev

“The main drivers of the accelerated expansion we see in industrial construction projects in the U.S. and abroad are the following:

Due to stay-at-home orders and lockdowns throughout the U.S.,people had no choice but to shop online for household products, clothing,equipment, and food. The e-commerce and last-mile delivery trend has beenemerging rapidly for the last five years, but the pandemic accelerated growth and demand to numbers and targets that no one in the industry expected to see until 2030 (ratio of online sales vs. in-person retail shopping and dollar amountsspent online in purchases).

But the writing was on the wall for quite sometime pre COVID 19..The retail experience has changed dramatically in the last 10 years, and year-over-year,less Americans go to physical brick and mortar stores for everyday consumer goods. Instead, they’re opting for online platforms which have been improving their ease of use, variety of products, and most importantly: delivery speed. It doesn’t pay to get in the car and drive 30 minutes to the store, walk around the store for an hour putting your goods in the cart, and then driving backhome, if for the same price, I can click a few buttons and have all my goods delivered – sometimes as quickly as 2 hours.” 

Steve Buss

“Right now, three major factors are driving industrial demand — the rise of e-commerce; manufacturing growth due to reshoring; and supply-chain diversification. All three were accelerated due to the pandemic..

E-commerce was a huge driver of industrial real estate expansion before the pandemic and — after a short pause initially in 2020 — it’s only expanded in cities of all sizes.

Industrial real estate demand is a natural reaction of the marketplace, which has doubled down on online sales — not just business to consumer, but also B to B. Corporations are expanding how much they’re willing to buy via e-commerce just like household consumers.

We’re living in a world where competitive delivery pressure is ratcheting up every day. Everyone needs to find warehouse space to help them deliver goods to their customers. They want to offer expedited delivery and develop last-mile e-commerce supply chains to compete against giants like Amazon.

Fulfillment and third-party logistics companies are increasingly in need of distribution centers within a short distance of urban and suburban areas. That’s not going to change. Demand is only going to grow, especially in secondary and tertiary markets. In-fill industrial — as well as new construction — will continue to grow in 2021.

Will Curtis

“The biggest things that has driven the growth in industrial is online shopping and the changes in the consumer purchase process. Between delivery driving the need to last-mile distribution to the click and pick up has increased the need for warehouse space for retailers.

The other thing that is adding to this trend is the move to suburban office space and looking at flex properties to combat COVID concerns like shared common areas, elevators or shared HVAC systems. Flex buildings have the ability to mitigate those issues and have driven the demand for more industrial demand.”

Fletcher Dilmore

“One of the main drivers of this expansion is that traditional big box retailers are conceding market share to online retailers, creating increased demand for industrial warehouse and fulfillment space from these growing online retailers who do not have a traditional physical presence.”

Michael Edwards

“Construction on industrial projects is booming, because we’ve seen consistently that despite periods of economic uncertainty or even crisis, industrial properties tend to remain stable. This means consistent cash flow and reliable investment growth. Industrial may not be the sexiest part of the real estate industry, but it might be the steadiest right now.

Additionally, sectors like e-commerce, data centers, and self-storage have recently seen higher-than-normal demand, and low supply. The onset of the COVID-19 pandemic accelerated the need for infrastructure to support these industries.”

Max Levinston

“Industrial was already growing at a fast pace before Covid, and this pandemic has accelerated many of these trends. In our market warehouse space either for sale or lease is quickly absorbed, both by investors and owner users.”

Bruce Lowry

“In our experience, the drivers in construction has two main drivers, (1) increased demand for warehouse space in general and (2) the lack of modern industrial and warehouse space. Increased demand for industrial warehouse space has significantly increased over the past several years as consumers have increasingly changed their purchasing habits from brick and mortar in person purchases to online orders with door step delivery. The global pandemic has increased this demand for door step delivery of online goods and services including perishable goods such as groceries.

Older consumers were forced to learn new technology and they are learning that they like the convenience of door step delivery. In turn, this increased demand for online ordering and door step delivery has increased the demand for both large warehouse projects and so called last mile warehouse space.

Secondly, outdated building infrastructure including lack of access to technological innovations such as communication and data infrastructure, buildings designed for automated sorting and delivery systems are increasing demand for newly constructed warehouse and manufacturing space. Buildings with narrow spans containing repetitive floor to ceiling support structures simply will not accommodate modern automated manufacturing and warehouse logistics systems and these buildings are being replaced with structures that contain these innovations.”

Bryan Shaffer

“E-commerce sales was growing before the pandemic, but the crisis accelerated this trend, with consumers unable to obtain goods from some retailers. Further, it was harder for manufacturers and sellers to get their goods to the market therefore many small suppliers have partnered with Amazon to keep their distribution line open. Overall, year over year industrial values increased 8.1% from February 2020 to February 2021, more than any commercial real estate asset class. The E-commerce sales resulted in much stronger demand for logistics and more demand for cold storage space.”

 

Industrial real estate has fared better that other asset classes in the last year. How has 2020 affected the industrial market this year and beyond?

Grigoriy Azayev

“The industrial market in 2020 has become the sweetheart ofCRE. Everyone is chasing industrial deals and some of the biggest players inother asset types are jumping ship to bid on industrial deals. Unfortunately,it is creating a supply shortage in the market throughout the country, and prices for both leases and investments are on the rise. I don’t see this trend slowingdown because companies like Amazon have publicly stated they want to doubletheir square footage in the next year and are paying top dollar for class A industrial space and land. Regrettably, it’s weeding out the little guys and small-to-mid-size businesses that also rely on supply chains and logistical real estate.”

Steve Buss

“Another huge factor driving demand for industrial real estate is a much greater awareness of supply chain risk, which was exposed due to the pandemic shutdowns. Shortages of all types of goods revealed just how tight supply chains were for many sectors. For example, some U.S. automakers weren’t able to operate because they couldn’t get onboard computer chips. That led to sustained automotive inventory shortages. Until the pandemic, that was an unseen or under-rated risk in the supply chain. Now, it’s impossible to ignore such risks. Businesses are diversifying those supply chains and rethinking how they manage risk, including where they want to store finished goods.

While it’s typically more profitable to run a really tight supply chain, businesses faced a rude awakening and discovered it’s also much riskier. Businesses and their customers found they were taking on far more risk than they realized by holding very little inventory. They weren’t ready to handle the supply chain disruption. Now, they’re asking how much more inventory they should have on hand to make it through the next supply disruption.”

Will Curtis

“Certainly of returns is always going to drive investments. With large players like Amazon, Walmart, and others that they need additional warehouse space has added to the investment-grade properties and brought in more demand.”

Fletcher Dilmore

“2020 has made industrial real estate an essential asset class. Distribution and warehousing went from being apart of everyday business to being the everyday business. Had it not been for the pandemic, I think it is safe to say we would not have seen as quick of an adaptation of online grocery shopping, something that had been available, but was a minuscule amount of overall grocery sales in previous years. ”

Michael Edwards

“2020 was quite a year – and it was fascinating to see the shifts in the real estate industry. In commercial real estate in general, most markets saw a decline in demand – but industrial saw a significant increase in growth and investment. We anticipate that investors will be eyeing industrial properties favorably in the months ahead.

Part of the reason for this growth in industrial investment is the consumer behaviors that accelerated e-commerce and data centers when the pandemic rocked our worlds last year. Grandparents who’d never ordered anything online before were suddenly getting groceries delivered and medications shipped and birthday gifts sent directly to their kids and grandkids from fulfilment centers. We expect this trend to continue, so demand will remain for the industrial properties needed to support those activities.”

Max Levinston

“Online shopping has been a huge reason for the increased demand. Many of these shifts in consumer shopping will not revert back once we’re further out of this pandemic..” 

Bruce Lowry

“The industrial and warehouse real estate market is strong and the demand for new industrial and warehouse properties across all sectors will continue as companies innovate and automate their manufacturing, logistics and delivery programs. We see only increases in this sector for the foreseeable future due to high consumer demand for e-commerce goods and the need to continue to automate manufacturing facilities.”

Bryan Shaffer

“The pandemic forced people to adapt to E-commerce. It likely pushed forward the market in the US by 5-10 years. People who were possibly thinking of looking at eCommerce were forced to utilize it during the pandemic to receive their needed supplies and services. In addition to industrial logistics demand, the vaccine also created more cold storage space. New technology has also developed quicker because of additional capital being invested in this space.”

 

Are there any other use-types besides e-commerce and cold storage that you see expanding more in the future?

Grigoriy Azayev

“We’re starting to see some secondary uses come into play,such as fleet parking for delivery providers and there has is a growing demand for movie studios and film production campuses in New York City. This is due to some excellent tax incentive programs for film production here and tremendous demand growth for instant and fresh content. There is also movement in the smaller “maker spaces” and manufacturers here in New York and other cities. The costs of shipping andoutsourced manufacturing on the rise, paired with long delays of production due to COVID-19, the cost of manufacturing in the U.S has become comparable to outsourcing due to a growing supply chain. It has become more and more seamless and cost-effective to manufacture all types of goods here in the states.”

Steve Buss

“Another issue that will drive industrial real estate in the years to come is reshoring or bringing manufacturing operations back to the U.S. Because of the pandemic supply chain issues, some companies are less convinced they want all their goods coming from one country like China if they can find local alternatives.”

Will Curtis

“In San Antonio, we are seeing a huge push for Cyber Security. Flex space is showing as a great cost-effective option compared to traditional office buildings. Cyber Security SCIF (Sensitive Compartmentalized Infrastrcture) is expensive to build out and flex gives a lower-cost option. Things like Port San Antonio has been a huge driver for the growth in San Antonio.”

Fletcher Dilmore

“I have seen an increase in demand in my local market for smaller flex space by tenants that have a specialized manufacturing or business specific needs.”

Michael Edwards

“Data centers, undoubtedly, will continue to grow in importance and their needs will evolve along with the technology that’s stored inside them. We’ve also seen self-storage grow over the past few years as a result of more people moving to smaller homes in urban settings. And, self-storage is a sector that tends to resist the overall trends during economic slowdowns – including this COVID-related one. More people than ever before are “working from wherever”, which means they can put their things in storage and hit the road.”

Max Levinston

“Self-storage and flex spaces.. Many investors are targeting the lucrative nature of self-storage, both industrial conversions and new construction. Flex space is also highly desirable for companies who need a few offices/conference room for staff which is connected to the warehouse.”

Bruce Lowry

“Self-storage and flex spaces.. Many investors are targeting the lucrative nature of self-storage, both industrial conversions and new construction. Flex space is also highly desirable for companies who need a few offices/conference room for staff which is connected to the warehouse.”

Bryan Shaffer

“Industrial overall is very affordable to build. Over time I expect to see an over-supply. This usually happens with real estate asset classes after they become over heated. I believe that e-commerce will drive more activity and offer a hybrid space between industrial and retail and logistics space will be incorporated into current retail properties. Walmart is an example of a brand where we are seeing this trend now.

The other likely impact on industrial will be the emergence of more food service, commercial kitchens, located within industrial properties, which will service the food delivery companies.”

 

What’s the #1 challenge industrial is facing in 2021?

Grigoriy Azayev

“The biggest issue that industrial real estate faces is beinga follower of the market rather than the leader. It’s great that Amazon candeliver my package to me in under 2 hours here in NYC from one of their manyfacilities, but if workers don’t return to the office and come back to living in the city, to who will they be delivering these packages? At the height ofthe pandemic, vacancy rates in NYC for residential buildings touched 25%, and to-date,offices are still at 15% occupancy. These huge investments into last-miledelivery will be a tremendous loss if the theme continues and people don’treturn back to NYC.

The second issue is more industrial real estate leads tomore air, water and noise pollution, and a substantial increase intraffic. In NYC, there is scarce industrial space and they depend on only a fewmajor roads that trucks can go on to reach the facilities. There are more andmore trucks and vans on the road, causing ridiculous traffic, and it’s alreadybecome an ongoing concern in the city.”

Steve Buss

“Industrial real estate is one of the few big winners of the pandemic. We see enormous investment potential in industrial properties due to the expansion of e-commerce and the growing demand for warehouse space. We’re expecting growth not just in big cities, but also in secondary markets, particularly in the Midwest.

For tenants looking for industrial properties to lease, it’s very competitive. It’s hard to find space. Due to high demand, industrial rents are going up. When tenants get ready to renew their leases, they’re getting sticker shock. They’re not used to that. That all means, of course, that industrial real estate is a particularly sound investment.

While many bigger box distribution centers are going up in the biggest markets, we see huge potential for developing or building smaller industrial properties closer to urban centers in secondary and even some tertiary markets. You can find 20-, 30- and 40-year-old buildings in excellent locations and make them very functional for multiple tenants. If you stay near urban centers, you can deliver last-mile supply chain accessibility, but also access to workers.”

Will Curtis

“Lack of inventory and pricing smaller users out of the market. I am working with a client now, who is more price-sensitive and we simply can not find space and the few things we do find are more expensive than what can be unwritten into the business plan.”

Fletcher Dilmore

“Keeping up with demand with functional product. Industrial has been the safe haven for real estate investors during COVID, but that doesn’t mean all industrial product is created equal or as equally valuable. There are many industrial buildings across the U.S. that are for practical purposes functionally obsolete. This can be because of low ceiling height, inadequate power supply, difficulty moving trucks in and out, lack of proper sprinkler systems, distance from major transportation arteries, etc.”

Michael Edwards

“We feel really optimistic that challenges will be few for industrial properties this year, at least relative to the opportunities in this part of commercial real estate. But it will be interesting to see how many people miss shopping in brick and mortar stores or having face-to-face interactions, cutting into the growth of e-commerce. We don’t expect that to happen, but it’s something industrial investors should be looking at.”

Max Levinston

“Supply, the availability is between 1 – 2% right now for quality industrial space, both for lease and for sale.

Developers cannot keep up with the demand which has also caused the prices of industrial land to go up as well. We’re seeing the prices/sq ft go up and some buildings getting leased before construction is completed.”

Bryan Shaffer

“Developers will race to add more industrial and flex inventory to the market because of the lower cost compared to other types of real estate and the current low vacancy rates. At the same time, overall changes in the retail market caused by e-commerce, will lead to more repurposing of existing better located retail properties into some type of hybrid distribution/ retail projects. Both factors together can lead to oversupply in some markets. Markets with higher land cost and more limited development opportunities will out preform markets with unlimited expansion potential. The long-term need is going to be for better located properties closer to shipping and population centers This will ensure that products can be delivered quicker. For 2021, I believe industrial will overall remain very strong, but the new growth in development may hurt the asset class in the future.”

 

Source: CommercialCafe