Tag Archive for: post-pandemic trends

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Industrial has been on quite a tear over the past few years, as changes in consumer behavior have driven demand for more logistics and fulfillment facilities in key markets.

And according to one industry expert, the sector should stay a favored asset class for experienced investors, despite rising capital costs.

“Post-pandemic consumer behavior has changed and the rate of growth in ecommerce has slowed which has already led to pullbacks by some companies,” says Greg Burns, Managing Director at Stonebriar Commercial Finance, noting Amazon’s recent announcements regarding its industrial portfolio. “Demand for industrial though was driven by other factors as well including a move toward onshoring and the disruption of just in time supply chains.”

With that said, however, Burns said “depending on the what and the where, I would not be surprised to see cap rates widen another 50 to 100 basis points.”

“The cost of debt and equity capital have increased and cap rate hurdles have increased for institutional buyers,” Burns says, adding that he recently saw an increase of 100 basis points in an appraisal for a property in a market where his firm closed a deal six months ago.

Burns will discuss what’s happening in the capital markets in a session at next month’s GlobeSt Industrial conference in Scottsdale, Ariz. He says Stonebriar’s definition of industrial includes not just warehouse and distribution facilities, but manufacturing, life sciences, cold storage and data centers as well, and notes that “each of those sub-categories have their own dynamic and, broadly, all are growing.”

“We prefer properties with multi-modal access, especially those near ports, with most opportunities we’ve seen recently being to the southeast of a line drawn from Baltimore to Phoenix,” Burns says. “We also pay attention to outdoor storage capacity as that has become a greater consideration for tenants. There have been several announcements of new manufacturing sites relating to microchip and electric vehicles which should lead to demand for new logistics properties nearby.”

As the costs of debt capital rise, Burns says Stonebriar’s underwriting will continue to focus on the sponsor, asset and market and “that won’t change.”

“We do few spec development deals and will likely be more granular on understanding the demand/supply side of a respective market,” Burns says.

Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.

“From our perspective, there will be a premium on a sponsor’s experience and capacity,” Burns says. “I anticipate industrial will remain a favored asset class for investors although those with less experience in the sector could pull back until the economy recovers.”

 

Source: GlobeSt.

 

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For most of the last few years, Amazon has been the dominant force in South Florida’s industrial market, but the e-commerce giant’s recent pullback hasn’t had a negative impact on the region’s warehouse market, industry insiders said at Bisnow‘s South Florida Industrial Outlook event last week.

“The last few years it has all been Amazon, right? They were making 90% of that e-commerce growth. They were really bailing us out of all that space we could not lease,” Bridge Industrial Vice President Aaron Hirschl said at the event. “Now it’s everybody else playing catch-up. It is 85% of all the e-commerce deals are other groups other than Amazon. It’s really good to see that positive growth there.”

The vacancy rate for South Florida industrial properties dropped to 1.8% in the third quarter, according to JLL research. Rents have grown 60% year-over-year, to an all-time record of $14.35 per SF. Construction is speeding up as a result: So far in 2022, approximately 2.3M SF of new product has been delivered. Over the next 18 months, JLL projects deliveries to hit 7.8M SF.

“Much of that is still fueled by e-commerce, even in the absence of the industry’s leader,” Prologis Vice President Jason Tenenbaum said at the event, held at the GalleryOne Fort Lauderdale by Hilton. “I’d say e-commerce continues to be the predominant player, I am guessing in the majority of our portfolios, and that’s notable particularly because of Amazon’s specific slowdown this year,” he said. “I would say the vast majority of our work is centered around that space.”

Tenenbaum said that he expects more leasing in the e-commerce space to come from third-party logistics companies as retailers themselves look to outsource their distribution. Those companies, called 3PLs, have accounted for more than 35% of all warehouse leasing in South Florida so far this year, according to a just published CBRE report.

“I think as pricing and rents continue to rise and supply is constrained, you will see a lot more of all of our clients electing to 3PL their supply chain,” Tenenbaum said.

After e-commerce, the biggest driver of demand in the industrial market is in the food and beverage industry and their need for cold storage, developers at the event said. The global cold storage market was over $9.6B last year and is projected to reach $11.3B this year and hit $25.4B by 2027, according to an October market report by Reportlinker.

“If you look at where the demand is the most nationally, clearly cold storage will be it,” BBX Logistics Properties Mark Levy said. “In South Florida, if you look at the footprint of the market as a percentage of the total base, it’s a very, very small amount of cold storage space product that has been delivered.”

Tenenbaum said that the tourism industry in particular has been active in looking for cold storage properties, a piece of the market that had been largely absent for the previous two to three years.

“There was a time in the last 24 to 36 months where the tourism activity was way down. Now it’s back at a high pre-pandemic levels,” Tenenbaum said. “As tourism has come back and the cruise ships are set to sail again, that’s a really active space.”

Levy said that while the cold storage market is “still tremendously undersupplied,” building the space on a speculative basis is still a rarity. But Bridge Industrial launched a spec cold storage warehouse in Hialeah last year, and signed FreezePak to a 312K SF lease in March.

“I remember when Bridge was working on that development and we thought ‘Those guys are crazy! There is no way that they are going to get those rents,’” Hirschl said. “And sure enough, they leased it out and knocked it out of the park. They proved a thesis and it was really cool to see it happen.”

Kroger, the largest grocery chain in the country, doesn’t have a supermarket in South Florida, but it opened a 60K SF warehouse in Opa-Locka this year to start delivering groceries directly to customers’ homes. Kroger said in its September earnings report that its delivery sales grew by 34% from the previous year.

“Kroger does not have any grocery stores here but they are renting near people’s homes,” Hirschl said. “That trend is really interesting to see if they can really penetrate the market here.”

Butters Construction & Development Director of Acquisitions Adam Vaisman said on a panel that, in addition to e-commerce and food and beverage companies, manufacturing is an increasing presence in the market. He said his firm signed a 200K SF lease with a manufacturing firm in Broward County and was getting ready to break ground.

“You will definitely see more of the manufacturing jobs, especially given our labor pool here in South Florida,” Vaisman said. “We are definitely starting to see that and I think that trend is starting to pick up if you continue to have global instability the way we do.”

But while manufacturers and cold storage providers largely need specialized space, e-commerce users are taking any space they can get in a market with soaring rents and sub-2% vacancy.

“Location is the most important always, so for e-commerce users, if they can’t find a new building and it’s a market they need to be in, they will make it work with a Class-B space or a Class-C space,” said Seagis Property Group Vice President of Florida Acquisitions and Leasing Bradlee Lord. “Public transportation will only get increasingly worse as the population grows. With Covid in 2020, the roads were still relatively busy. Location matters as congestion gets worse.”

 

Source: Bisnow

 

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Among the harsh lessons the pandemic taught industries is that relying on thinly sourced supply chains, particularly for manufactured goods, can be a mistake.

Something coming from that experience is a degree of reshoring manufacturing—bringing it back to the U.S., as Avison Young notes.

The push has been growing for “several years … with 1.3 million manufacturing jobs brought back to the U.S. since 2010.” Manufacturing grew by 21.6%, according to the Census Bureau, and new manufacturing facilities construction was up 116%. The reason is to diversify supply chains.

“Many companies are investing in domestic facilities based on lessons learned during the pandemic, as product shortages disrupted their business flow,” the firm wrote. “Recent intense pandemic lockdowns in China took many businesses by surprise and threw another jolt into the already disruptive supply chain. By locating facilities in the U.S., they can mitigate risk and gain more control over the production, quality and distribution of their products.”

Technology companies have been leaders in the push to reshore manufacturing. Examples are multi-billion-dollar chip plants, thanks to the $52 billion CHIPS and Science Act that was part of the Inflation Reduction Act.

The shift isn’t only the province of giant companies like Intel, Samsung, and TSMC.

“Many small- to mid-sized companies are also reshoring or expanding domestic manufacturing,” said the report. “Aside from the supply chain benefits, companies are also trying to work around skyrocketing shipping costs and other transportation costs. And, geopolitical issues related to China are prompting some companies to reduce their reliance on those foreign labor ties.”

With the increase of manufacturing facilities comes a boost to warehousing, because factories need storage and distribution space, as do tiers of suppliers to these manufacturers and potentially distributors.

“Despite the higher labor costs of operating in the U.S., it can be more cost-effective to manufacture products closer to the customer base, when reduced shipping and distribution costs are factored in,” the analysis noted.

An additional benefit that experts in supply chain and manufacturing logistics have noted for at least 20 years is shortening that by shortening the distance to a customer base, a company can react more quickly to changes in the market. Having factories in Asia and then shipping goods by sea leaves 30 to 60 days of inventory in transit, setting an effective time barrier on how quickly updates, design modifications, or error corrections can be incorporated.

 

Source: GlobeSt.

 

Paris, France - December 15, 2016: Amazon Prime Parcel Package. Amazon, is an American electronic commerce and cloud computing company,based in Seattle, Washington. Started as an online bookstore, Amazon is become the most importrant retailer in the United States by market capitalization

Amazon.com Inc. is expected to scale back its warehouse holdings nationally, including in Broward County.

At a June 8 public meeting, John Biggie, chairman of the Coral Springs Economic Development Advisory Committee and principal of JBI Development, said the Seattle-based e-commerce giant has “nixed” plans to move into 225,000 square feet within the Commerce Park of Coral Springs, at 4000 N.W. 126th Ave. The facility was slated to hire 200 people, according to previous announcements from Amazon.

Yuri Quispe, a broker with JLL and a member of the committee, said Amazon will also pull out out of a lease deal that it signed 2.5 years ago at a couple warehouse facilities near Sample Road and the Florida Turnpike.

In May, it was widely reported that Amazon executives said the company was losing billions of dollars due to fewer e-commerce sales and an overabundance of warehouses. As a result, the company planned to shrink its national industrial footprint.

Within South Florida, Amazon controls 8.7 million square feet of distribution space. Of that amount, about 2.3 million square feet has yet to be occupied, according to figures from CoStar Group.

Aside from Commerce Park, a source said Amazon has yet to fill an 823,000-square-foot facility at 4600 N. Hiatus Road in Sunrise, a 216,000-square-foot facility at 3750 Palm Drive in Homestead, and 1 million square feet at 13200 S.W. 272nd St. in unincorporated Miami-Dade that it purchased in 2020.

Keith Graves, senior VP of Berger Commercial, said that in the “big scheme of things,” Amazon will have a minimal impact in this industrial market, which has more than 45 million square feet of inventory.

“We are in the single digit vacancy rates. It’s not going to have a dramatic effect,” Grave said.

Nationally, the industrial market is shattering records. However, Quispe and Biggie warned that rough times may be ahead for Coral Springs’ industrial sector.

“We are starting to hear key indicators of leasing activity drying out and demand slowing, of not enough money to put a down payment,” Quispe said during the meeting. “All these ingredients are adding up … and if we are not proactive … when it hits it is going to be very bad.”

Biggie added: “The market has changed dramatically in the past 60 days.”

The 430,000-square-foot Commerce Center of Coral Springs was built in 2018 by Pennsylvania-based EQT Exeter. Exeter paid $14.88 million for the site a year prior. EQT Exeter sold Commerce Center to an unknown buyer in late 2021 as part of a $127.8 million deal. EQT Exeter still manages the site.

 

Source: SFBJ

 

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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