Tag Archive for: industrial space demand

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Here Come The Next Waves Of Industrial Demand

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When a company wants to build a new building for industrial use, it would typically start with the real estate manager and the supply chain manager meeting with the C suite to fund the project.

During the pandemic they might well have gotten what they wanted. But now these executives are likely leaving that meeting empty-handed. The C suite mantra to these and many other requests is to avoid committing capital as much as possible.  ‘Come back with a plan B,’ they are told.

Jake Fraker, Global Head of Industrial & Logistics Capital Markets for Newmark, relayed this hypothetical example during a webinar held by GlobeSt.com last week and sponsored by JLL Technologies. It was a telling illustration of the state of demand for industrial product at the moment. The demand is there, clearly, but current financial conditions have made decision makers cautious about investing in both assets and additional space.

“No one is building new buildings if they can get by with a slight delay,” Fraker said.

Newmark stats on third quarter activity also demonstrate this trend. Nationally, absorption measured 47 million square feet for the quarter, a solid if muted demand, Newmark said, with the volume approximately 15 million square feet less than 2019’s quarterly average net absorption.

“The signs of this cautiousness are everywhere,” Fraker said. “We are seeing careful controls on new supplies. There are a few places where there might be an oversupply but then the developers slow down or the lending partners slow it down.”

That said, this current state of demand is not even remotely reflective of the wave of activity that experts expect in the future for the industrial class.

E-commerce-generated demand continues, according to participant Alex Motiuk, director of acquisitions for Greek Real Estate Partners. Couple that with other trends emerging in the marketplace, such as the growth of onshoring and nearshoring, the increasingly globalized nature of supply chains and the rise of secondary markets in these strategies and experts are quite confident that industrial will continue to be a top asset class for commercial real estate.

During the pandemic, the sensitivity of global supply chains became painfully apparent to all parties in this sector and the memories of empty store shelves that often resulted from a sudden change in consumer behavior – think back to the run on toilet paper when it became apparent how serious COVID-19 was – have not been forgotten.

“The global supply chain is completely intertwined with the logistics sector,” Fraker said.

Even despite the current focus on costs, many companies continue to lease additional distribution space than they typically need to ensure their supply chains continue to flow smoothly – a trend that is expected to continue into the future.

“We have seen much higher inventory volumes, a lot more inventory to manage,” said Motiuk. “Tenants are now much more methodological and try to get ahead of requirements. At the same time, U.S. companies and foreign companies that serve the U.S. markets have recognized that global supply chains are vulnerable to geopolitical risk.”

Hence the rise of onshoring and nearshoring. To be sure, these trends have been long standing ones driven by complex factors. But they have lately achieved a heightened status thanks to certain U.S. legislation such as the CHIPS Act and the Inflation Reduction Act, which have encouraged manufacturing on U.S. soil. Other companies, recognizing that China has become an increasingly unstable partner due to political concerns, are migrating operations to Mexico. Nearby industrial facilities in the U.S. are subsequently benefiting from a huge boom in demand. Indeed, in the third quarter, secondary markets absorbed an increasingly larger share of demand, Newmark reported.

“There has been a big explosion in development in Texas and Arizona,” Conrad Madsen III, co-founder of Paladin Partners and another participant in the webinar, said. “Institutional capital never was interested in those markets before but now it is flowing heavily.”

“Global investors are all familiar with the key supply chain markets, such as Memphis Tenn., or Louisville, Ky.,” Fraker said. “We have a project in El Paso and it is getting a lot of attention from institutional investors. That is because El Paso is where onshoring meets nearshoring. El Paso is just one example, though. Today, many secondary markets are showing up on investment committees’ agenda as they eye expected future demand.”

 

Source: GlobeSt

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Impact Of Rising Interest Rates Mixed On Commercial Real Estate

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The past two years were like nothing ever before seen in South Florida.

A period of record growth was fueled by inbound migration, strong consumer spending and record low interest rates — all of which drove billions of dollars invested in the development of millions of square feet of commercial real estate.

Much of this was brought on by the pandemic. Now, the pandemic has subsided and the South Florida CRE market has come to a moment of reckoning. Or has it?

The Federal Reserve has raised interest rates five times this year, including the increase of 75 basis points on Sept. 21, all in an effort to stem inflation. The Fed’s effort to keep the economy moving at the start of the pandemic led to the slashing of its target rate to 0%-to-0.25%. It remained there for the next two years, until March, when it set its first increase of 25 basis points.

The era of relatively cheap money for commercial and residential borrowers has come to an end. While the current rate of around 3% to 3.25% still is historically low, borrowing costs are at their highest level since 2019. In June, Federal Reserve Chairman Jerome Powell noted that the rate could reach 3.8% by late 2023. Simply put: These are the most aggressive rate hikes in generations.

This leaves developers and owners of office, industrial and retail projects to perform a delicate balancing and forecasting act incorporating borrowing costs versus long-term demand.

With borrowing costs rising, and fears of inflation and a possible recession looming, how will CRE across South Florida respond? It’s impossible to judge from how other markets are responding. Some have seen commercial projects tabled and vacancies rising, even if rents remain stable.

South Florida Is The Outlier In The CRE Marketplace

Development remains robust. Warehouse, logistics and industrial projects continue unabated from Homestead in the South and Palm Beach County’s Western expanse to the North, with numerous infill projects in between. Luxury rental apartments in hot markets, such as Brickell, Coral Gables, Fort Lauderdale’s Flagler Village and downtown West Palm Beach, are rising to meet the demand of the more than 800 new arrivals still coming to Florida daily.

Conflicts exist between remote workers and their employers calling for a “return to the office;” and with the hybrid workplace model continuing to evolve, future office needs remain unknown. Yet, the region has numerous dedicated and mixed-use Class A projects in development.

While the concept of “headwinds” comes up in any conversation about the unknown impacts of rising interest rates, inflation and the possibility of recession, South Florida and the state are outliers for other reasons. Whether through REITs (real estate investment trusts), private equity, hedge funds and other institutional capital seeking a solid vehicle for their funds; family offices and investors looking for a hedge against inflation; Latin American families seeking a less turbulent harbor for their money; those looking to real estate as a hedge against inflation; or developers bullish on local market prospects, Florida is rich with liquidity.

 

Source: SFBJ

Miami Developer Buys Coral Springs Warehouse For $15.7M

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A company managed by Jon Samuel, the developer of Midtown Miami, paid $15.7 million for a warehouse in Coral Springs.

Coral Vutec Properties LLC, managed by Daniel Sinkoff, sold the 105,183-square-foot warehouse at 11711 W. Sample Road to MGX I LLC, managed by Samuel of Miami-based Midtown Group. The buyer was represented by Josh Wade of Delray Beach-based Flagship Retail Advisors.

The price equated to $149 per square foot. The warehouse last traded for $5.25 million in 2009, so it gained in value. One of the largest tenants is Access Fabricators Corp., which is also managed by Sinkoff.

 

 

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Industrial Construction Reaches All-Time High, But Tenants Will Still Struggle to Find Space

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In Prologis’ recent third quarter earnings call, CEO Hamid Moghadam was blunt in his assessment of the industrial sector’s supply-demand equilibrium:

“With vacancies at unprecedented lows, space in our markets is effectively sold out.”

It is, of course, little secret that industrial rents are at a premium and tenants are jockeying for what space they can find. But new details in Prologis’ Industrial Business Indicator report show just how much of an uphill climb supply will have before it meets current and future demand.

Prologis reports that construction starts have risen to an all time high of 120 million square feet, with speculative construction representing roughly 88% of all starts in the quarter. But pre-leasing has also reached its own record of 70%. That, coupled with construction delays, which are spreading out deliveries, means the risk of oversupply is low.

“We do not anticipate significant supply relief in most key locations; new supply is concentrated in low-barrier secondary and tertiary markets and the outlying submarkets of inland markets,” Prologis Research said.

Indeed, it concludes that demand is set to outpace new supply through the near term. The reasons include the ongoing rise of e-commerce penetration and companies’ move to build resilience into their supply chains. In addition, retail sales are robust, and trillions of dollars in pent-up savings and record-high consumer net worth should support future spending growth.

Prologis Research forecasts net absorption of 375 million square feet and deliveries of 285 million square feet for the full year.

“Looking ahead, we expect that market conditions will remain exceptionally competitive for customers looking to expand, making it essential to plan early and move quickly.”

 

Source: GlobeSt.