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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

Glowing retro neon 'no vacancy' sign against cool blue wall background

Everyone is becoming more accustomed to seeing small trucks roam their neighborhoods, delivering goods ordered online.

But even as the coronavirus pandemic greatly intensified demand for these services, most municipalities are reluctant to approve proposals to develop new industrial service facilities where distributors and other businesses can store, maintain or dispatch vehicles, heavy equipment or bulk materials.

“Nobody wants to live next to a truck terminal,” JLL Senior Associate Kate Coxworth said. “That not-in-my-backyard, or NIMBY, attitude keeps new supply low, sending rental rates soaring for existing industrial service facilities in markets across the U.S.”

That’s helped in the past 12 months to draw in a new cadre of developers and investors who now see these facilities as an essential component of the rapidly expanding industrial sector.

“These facilities are the skeleton of the supply chain, and there are more people making the discovery that there are real opportunities here,” Industrial Outdoor Ventures CEO Tom Barbera said.

Barbera started Schaumburg, Illinois-based IOV about five years ago, and for most of that time, only three or four other firms specialized in acquiring and developing properties within the niche sector, he said. But things changed in 2021. A new group of six to eight firms is now out there and has made the market for industrial service facilities more competitive.

“And I think we’ll continue to see new folks get involved,” Barbera said.

National investment players have also joined the fray. IOV formed a joint venture in March with San Francisco-based Stockbridge, planning to make between $100M and $200M of acquisitions annually. IOV completed 24 acquisitions in its first four years, but thanks to the new joint venture, it has picked up the pace and has closed 16 new acquisitions since February.

That includes the 39K SF 1401 North Farnsworth Ave. in Aurora, Illinois, a Chicago suburb, and the 22K SF 4212 Perry Blvd. in Whitestown, Indiana, an Indianapolis suburb. Both are 100% occupied by MacQueen, a fire truck and emergency equipment provider that uses the properties for truck maintenance and repair.

“By the end of this year, IOV could close on another 20 properties and be in at least a dozen major metro areas, including South Florida, Atlanta, Chicago, Dallas and Houston,” Barbera said.

 

JLL also recognizes ISF’s growing importance as an asset class, and plans to establish a group of specialists that will handle such transactions, according to Coxworth, who helped represent IOV in the Aurora and Whitestown deals.

“JLL researchers have started tracking the nationwide vacancy rate among ISF properties,” Coxworth said.

It now stands at 3.1%, and with many municipalities expected to continue blocking new facilities, especially in dense residential areas now served by so many delivery trucks, investors can be confident the market will stay tight. In addition, ISF tenants promise steady returns.

“Almost all of the tenants are signing 10-year leases because they all understand that this is a hard commodity to find, and once you do, you better hold onto it,” Coxworth said.

These tenants have shown a willingness to pay much more in rent as the industrial boom continues, according to Timber Hill Group Managing Partner Cary Goldman, who founded the Chicago-based firm in 2018. The first truck parking facility he bought was near southwest suburban Stickney and Chicago’s Midway Airport, and tenants typically were paying about $135 per month for each space.

“But spaces in the same area now go for between $275 and $300,” Goldman said. “And spaces near Chicago’s O’Hare Airport can cost $375 and are trending toward $400. What other sector has seen its rental rates more than double in just a few years? Although that will certainly help bring in more investors, it’s a management-intensive business, and actually operating industrial service facilities will probably stay with specialists.”

Unlike the new distribution warehouses so popular with investors, ISFs sometimes have hundreds of tenants, each needing just one or a few truck spaces.

“It really is akin to self-storage,”  Goldman said. “And setting rental rates isn’t easy, as no one tracks the information needed to generate comps. There is no CoStar for truck parking places, The information is not easy to obtain and it takes a lot of real ground-level research. It’s also not a trophy asset,” he added. “It doesn’t look pretty on a brochure. It’s a lot of gravel behind a fence.”

Timber Hill Group now owns 16 assets, according to Goldman, and like IOV, plans to keep buying. It formed a joint venture in September with Chicago-based Champion Realty Advisors, and over the next 12 to 18 months the venture plans to acquire $150M of assets in infill locations near road interchanges and rail networks.

He said he expects that the market for ISFs will soon get even tighter in most metro areas. Not only is it tough to get the proper zoning and other approvals from cities for new truck parks and storage areas, but ISF owners can frequently score deals to transform existing spaces.

“Supply is actually coming off the market, because it’s being converted to other uses, an added bonus for ISF owners, Goldman said. “It provides good cash flow while you wait for great development opportunities.”

 

Source: Bisnow

 

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A new chapter is emerging for the closed Macy’s at the Pompano Citi Centre as developers have applied to replace the now-shuttered department store with a 356-unit apartment complex.

The Pompano Beach review committee on just gave an initial blessing to the proposal by the Morgan Cos. of Houston, which has developed or is in the process of building rental projects in Fort Lauderdale, Miami and Boynton Beach. Besides Florida, Morgan has projects in its home state of Texas, as well as in Missouri, Arizona and California.

The proposed luxury multi-family development in Pompano Beach is yet another installment in a trend where vast shopping complexes are giving way to new uses as consumers opt to shop online instead of driving to crowded malls and big box stores.

“I think shopping center owners are recognizing they have good pieces of land in good locations,” said Hugo Pacanins, Morgan’s regional development partner for South Florida. “Bringing residential to that existing mix accomplishes everything. You’re activating the center and bringing 24-7 people to the shopping center. It’s a trend we’re seeing nationally. You’re starting to see a lot of these projects being delivered in Pompano Beach and doing really well. I think that will bring new life to the area.”

But the face of commercial life in the Pompano Citi Centre neighborhood has changed along with a major overhaul in retailing. Macy’s shut the Pompano store last spring as part of a plan to streamline its operations amid sizable financial losses nationwide. That left an opening for the Morgan Group to buy over 12.1 acres of land — most of it from Macy’s and a portion of the mall parking lot from the shopping center owners. The developer has yet to set any prices, sizes or layouts for the apartments. But the buildings will be four stories in height with views of the nearby municipal golf course.

“We’ll have a big range of units from studios to three bedrooms,” Pacanins said.

After gaining its first green light in a lengthy approval process, Morgan will make “minor adjustments” to its application, which will then move to the Planning and Zoning Board for a public hearing in January, a city spokeswoman said.

The city’s board is currently targeting Jan. 27, 2021, for a public hearing. The full City Commission would then have to give its approval, and a Broward County land-use plan needs to be changed to reflect the proposed new land use to “irregular residential.” It is currently zoned commercial.

The review committee also has urged Morgan to communicate with residential neighbors who live north of Copans Road, which borders the northern edge of the Citi Centre.

“One of the advantages this site has is we’re abutting a golf course and it’s adjacent to a shopping center,” Pacanins said. “Traffic is always a concern, but there will be a lot less traffic than what Macy’s was generating. We’ve still got a long way to go and looking forward to getting this deal started in 2022.”

 

Source: SunSentinel

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Industrial prices could set to increase as a result of increased activity and rents during the pandemic.

According to a recent survey from RCM/LightBox, industrial players expect rents to increase from 4% to 7%. The asset class has already proven to be resilient during the worst months of the pandemic. As a result, many investors have flocked to the asset class.

“Experts in the industry—brokers, investors and developers—shared with us their expectations that by the end of the year we’d see pricing and rents increasing from 4-7 percent. Those expectations were expressed for many primary and a number of secondary markets, in key population areas, across the country,” Tina Lichens, SVP of broker operations at LightBox, tells GlobeSt.com.

Not all industrial assets are created equal. Manufacturing, for example, has not performed well during the pandemic. Investors as focused on ecommerce-related uses, pharmaceutical-related uses and any industrial supporting essential uses.

“Among the industrial properties to watch are those tied to consumer goods, pharmaceuticals, and other essential services, along with last mile facilities that support growing population bases with quick delivery options,” says Lichens. “Not to be overlooked are mission critical facilities, such as data centers and corporate food products facilities. Data centers, for example, have become increasingly important because so many people are working from home.”

Manufacturing and outdated industrial—which could pose a higher risk in a down market—are the least popular.

“Those subcategories that face the greatest exposure could be older, obsolete facilities along with smaller multi-tenant facilities, particularly those not in strong and established metro corridors,” says Lichens. “Given some of the uncertainties that exist in the overall economy, particularly for small businesses, it may be difficult to underwrite the acquisition of these facilities without predictable cash flow.”

The increased demand for ecommerce and the expectation of increased pricing has created enthusiasm for the asset class, but Lichens says that there is no reason to think that investors are being overly positive.

“Various reports point to growing consumer demand for online shopping and significant increases in store and online activity from Target, Walmart and others. Even before the pandemic, the experts pointed to the increase in ecommerce activity as reason to be bullish on the industrial market,” Lichens says. “The pandemic has truly emphasized our reliance on ecommerce and caused certain areas to experience tremendous growth. With more people in the U.S. accustom to and now embracing ecommerce, it has become a new way of life that has changed our entire consumer culture. It is difficult to envision a shift in the other direction.”

 

Source: GlobeSt.

As part of Colliers International South Florida’s annual Industrial Owners Forum, more than 50 institutional owners gathered in Miami.

They converged to take part in a closed discussion on the state of the industrial market in South Florida, where they own properties.

Steven Wasserman, executive vice president of the Colliers International’s South Florida industrial services team, hosted the forum. He sat down with GlobeSt.com to highlight the main takeaways from the discussion and the sentiment these influential leaders have about South Florida’s industrial market. In part two of this exclusive interview series, he spoke about evolving industrial market trends.

“There’s still a lot of excitement surrounding e-commerce and the impact it’s having on brick and mortar retailers,” Wasserman tells GlobeSt.com. “While many retailers are downsizing their retail stores, there is a growing demand for distribution space as consumers are buying their products online. Distribution centers near urban cores are in high demand.”

Wasserman pointed out another trend shaping the industry: construction costs. Construction costs have been on the rise, but he expects they will most likely remain flat in 2017 as the condo construction market slows down.

“Institutional owners expect the cost of labor and construction materials to start to level off after years of increasing costs,” Wasserman says. “New development construction costs are ranging from $70 to $100 per square foot for new class A warehouse space and will most likely remain at that price throughout the year.”

On the other hand, he says, cumbersome environmental and permitting issues continue to slow the construction process down. That is forcing tenants to holdover because space takes so much longer to build out in South Florida.

Another topic of discussion was the trend of parking requirements. Institutional owners discussed the significant increase in employee and trailer parking requirements for all sites nationwide, especially “last mile” sites.

“This used to be a requirement from larger tenants but they’re now seeing it from smaller tenants in the 80,000-square-foot range,” Wasserman says. “We’re also seeing growing demand for cold storage facilities. As population continues to increase and lifestyle patterns change, we’re seeing increasing demand for cold storage facilities. This particularly true in South Florida where suburbs are becoming urbanized.”

 

Source: GlobeSt.