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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

The number of industrial buildings coming online nationally slowed slightly in the first nine months of 2018, after several years of strong growth.

A total of 237 million square feet of new industrial space was delivered across the country from January through September, down slightly from 243 million square feet year over year, according to a new report by Avison Young.

The slowdown follows a major growth period for industrial development across the country, with 1.5 billion square feet of new space coming online since 2012, the report said.

“The surge in deliveries in previous years left many markets struggling to absorb the new space, and developers unwilling to start new projects,” Avison Young principal Erik Foster said. “As the existing space is filled, new projects will start getting launched.”

Markets like Los Angeles and Chicago have been leading the way in industrial market growth, and developers have benefited from record low vacancy rates and strong rent growths. But after years of growth, even those markets slowed this year.

Chicago saw 10 million square feet of new industrial space in the first three quarters of 2018 — a steep drop from the 22.6 million year over year, according to Avison Young. Los Angeles saw 5.4 million square feet of new industrial space through three quarters, which is about 77 percent of the way to its 2017 total of 7 million square feet.

In Chicago, the drop in deliveries caused vacancy rates to continue falling, with the 5.7 percent vacancy in the third quarter a 20 basis point drop year-over-year. That’s not the case in Los Angeles, where vacancy in the Inland Empire area increased to 4.9 percent but is still near record lows.

While deliveries are down so far in 2018, they won’t be for long: More than 337 million square feet of new industrial space is under construction across the country, the report said.

New Jersey has already eclipsed its 2017 industrial delivery total, with 10.3 million square feet of new space coming online through three quarters of this year, compared with 9.7 million square feet delivered all last year.

In Miami, demand for warehouse space has pushed vacancy rates to a record low 2.7 percent in the third quarter, falling 33 basis points year-over-year. But more than 4 million square feet of industrial space under construction will increase the supply.

“Secondary markets across the country are now benefiting from the same economic factors that caused a surge of industrial development in larger markets,” Foster said.

Growth in e-commerce is leading companies to increase the amount of industrial space needed for productive storage and delivery. Columbus, Ohio, for example, has seen 4.3 million square feet of industrial deliveries so far this year, eclipsing 2017’s year-end total of 3 million new square feet. In Greenville, South Carolina, 2.8 million square feet has been delivered through the end of the third quarter, eclipsing 2017’s total of 2.3 million square feet of new development.

 

Source: The Real Deal

The industrial market is still hot across Miami-Dade and Broward counties.

Competition for industrial space is fierce in Miami-Dade and it’s driving demand from buyers and tenants who are eyeing smaller warehouse properties. That, in turn, is leading to higher lease rates, according to a recently released report by CBRE.

And in Broward County, a dip in vacancy rates is helping lure more outside investors and tenants amid a sizable amount of new industrial deliveries.

MIAMI-DADE

Vacancy rates in Miami-Dade held steady at 3.6 percent in the second quarter, up slightly from 3.5 percent the same period of the previous year.

Most of the leasing activity occurred in Airport/Doral (557,124 square feet), followed by Central Dade (218,984 square feet), and Miami Lakes (94,900 square feet), according to the report.

Rents are also rising. Miami-Dade’s industrial market had an average asking rate of $9.23 per square foot in the second quarter, up 3.9 percent compared to the same period of 2017, according to CBRE. More than 90 leases were signed totaling 1.9 million square feet, with an average lease size of 20,000 square feet, the report shows.

Overall sales for Miami-Dade’s industrial market during the second quarter amounted to $362 million with 34 transactions for a total of 2.5 million square feet, up from $78 million for 15 sales totaling 553,000 square feet in the first quarter. The average sale price per square foot in the second quarter was $145, and the average deal size was 73,500 square feet.

Hialeah continues to be a top industrial submarket in Miami-Dade. The North Hialeah submarket accounted to 50 percent of the industrial transactions in the second quarter of 2018. Among recent deals was Duke Realty’s $180 million purchase of Flagler Global Logistics’ 8 million-square-foot industrial park.

Nine buildings were delivered in the second quarter, totaling 1.1 million square feet of new industrial space. Foundry Commercial’s Carrie Meek International Business Park is among one of the largest industrial projects under construction in the region, totaling 855,000 square feet and set to be completed by the fourth quarter of 2018.

Despite numerous larger transactions, spaces in the 10,000-square-foot to 25,000-square-foot range are the most desired, and is expected to push rental rates for those buildings up near those sought for newer construction, according to the report.

BROWARD

Broward’s industrial market is showing no signs of slowing down. Vacancy rates dipped in the second quarter to 3.9 percent from 5.3 percent, on a year-over-year basis, the report shows.

Leasing activity was mixed within the region. Northeast Broward had the highest level of net absorption during the second quarter, at 168,672 square feet, but southeast Broward saw a negative absorption rate of 334,533 square feet. The report said the level of negative net absorption is due to the addition of at least three new buildings in the Pompano Center of Commerce as well as the 131,000-square-foot East Davie Commerce Center.

Broward’s industrial market had an average asking rate of $8.29 per square foot in the second quarter, up 3 percent compared to the same period of 2017, according to CBRE.

Overall sales for Broward’s industrial market reached nearly $200 million in the second quarter. Notable sales include Fortress Investment Group’s $66.4 million acquisition of a SuperValu distribution center in Pompano Beach, as part of a larger $483 million national portfolio deal. Another is Exeter Property Group’s portfolio sale of nine warehouses amounting to about $43 million.

Supply is also increasing in the county. One of the first buildings of the South Florida Distribution Center in Pembroke Pines is on the verge of being completed, offering 225,000 square feet, according to the report. Seneca Commerce Center I, spanning 222,000 square feet at Pembroke Park, and Coral Springs Commerce Center III, with 215,500 square feet, are on pace to be completed by the third quarter of 2018 and the beginning of next year, respectively.

Low vacancy rates and rising rents are expected to keep driving demand in Broward, the report says.

 

Source: The Real Deal

Multi-story warehouse development hasn’t caught on quite yet in the US, but it’s a big trend in some Asian countries that would require an overhaul of 18-wheelers to be fully realized here, says Mike Kendall, executive managing director in Colliers International’s Irvine, CA, office.

Kendall oversees Colliers’ institutional industrial investment platform for the West Coast, teaming with local experts in various markets in that region. GlobeSt.com sat down with him for a chat about the top industrial capital-markets trends he’s noticing and anticipating to grow in 2018.

Read more

New construction is fueling Broward County’s growing property values, which reached an all-time high this year, according to new preliminary 2017 values released Friday by the Property Appraiser’s Office.

The new figures will be used by local governments to set their tax rates and budgets for the coming year. (Click here to see the latest property value figures for the county and local cities.)

Leading Broward cities in new construction this year were Hollywood and Dania Beach, reaping the windfall of FPL’s new $1.2 billion “clean energy” plant in their portion of Port Everglades that was added to the tax rolls this year.

But right behind those cities were two that have been consistently near the top of the county’s new construction list in recent years: Fort Lauderdale and Parkland. They’re the only two Broward cities to be in the top five when it comes to new construction in each of the past six years. And they couldn’t be more different.

Fort Lauderdale is the county seat with a booming downtown and an upscale beach that are attracting substantial high-rise and redevelopment projects. Parkland, with its 30,000 population that’s a sixth of the size of Fort Lauderdale on the county’s northwestern fringe, doesn’t have a beach or a downtown.

What Parkland does have is vacant land to build on, something that’s a rarity in the rest of the county. In recent years, the suburban community has been annexing for development portions of the Wedge, a nearly 2,000-acre triangle of vacant land that was transferred from Palm Beach County to Broward in 2009.

“Developers are purchasing large agricultural parcels in Parkland and developing them into single-family home communities,” Property Appraiser Marty Kiar said.

Major builders there include Lennar, Toll Brothers and CalAtlantic Homes. The projects include the Parkland Golf and Country Club, Watercress, Mira Lago, Heron Bay and Parkland Bay. Construction in the city was largely responsible for a 52 percent increase in the number of Broward homes started during the first three months of this year.

“That land that came in is highly desirable as so many people want to be in Northwest Broward and Parkland,” said Broward Commissioner Michael Udine, a former mayor of the city. “They love our open space, great schools and family-friendly environment. People are moving from within Broward and many from out of state.”

The new figures released Friday put Broward’s new construction this year at $2.4 billion, which was $111 million more than the amount listed in the initial report that came out in May. The county’s overall taxable value came in at $177.3 billion, up $17 million from the May report.

Existing property values in the county are up 7.8 percent from a year ago, while the increase is 9.3 percent when new construction is included. For property owners, higher values signal a growing return on the investment they made, but they can also mean higher taxes to be paid.

Miami-Dade County is reporting an overall taxable value of $272.4 billion, an increase of 8.4 percent, with $8.2 billion in new construction. In Palm Beach County, property values reached $176.8 billion, a 7.3 percent increase, with new construction totaling 2.7 billion.

Among Broward cities, overall totals show Dania Beach leading the county with a 20.7 percent increase in property values and Hollywood second with a 15.6 percent increase. Fort Lauderdale values are up 9.3 percent, Pompano Beach 9.2 percent, Pembroke Pines 8.6 percent, Miramar 7.7 percent and Coral Springs 7.4 percent.

 

Source: SunSentinel