While Texas has available land to develop for investors and tenants alike, that isn’t always the case in some markets and submarkets. Judy Wall, president of East Port Properties Ltd., which develops and currently manages 2 million square feet of office and industrial properties throughout Nova Scotia, New Brunswick and Newfoundland, Canada, explains. “We have a unique situation in Halifax, Nova Scotia, where most of the industrial land belongs to the municipality; they clear and get land ready and sell it at the cost of that exercise. Once that package sells, they move on to the next. So, we have these large gaps where available land is limited, including now. As a result, our current industrial vacancy rate is under 3 percent. When something does go on the market, it gets snapped up really quickly.” Fortunately, East Port, which purchased a larger tract of land in the past, is moving forward with new construction, “and we are building this out much faster because we’re the only ones with available land at the moment,” says Wall.
In contrast, Eileen Lewis, BOMA Fellow, director of Property Management for TORCH Properties, LLC, in Tucson, Arizona, notes that this newly formed company with 600,000 square feet of mostly industrial properties is growing at a robust pace—addressing a similar demand in her city—but only through acquisitions. “It’s definitely a landlords’ market out there, which is very different than it has been for a while,” she notes. And Lewis should know, as she has experienced plenty of market ups and downs in the 30-plus years she has managed industrial properties in the area.
“It’s definitely a landlords’ market out there, which is very different than it has been for a while.”
Opportunities, But…
With such a strong landlord climate, adds Lewis, industrial tenants are realizing they don’t have myriad options, while concessions, such as free rent or significant tenant improvements (TIs), may be rare or non-existent. “It now is easier to negotiate the tenant paying for more tenant-specific types of requirements,” she says. In addition, CBRE’s Conroy points to how third-party logistics companies (3PLs) are “shoe-horning into what was traditionally underutilized spaces within their buildings or campuses” to meet existing needs, thereby further tightening the market. And, of course, e-commerce has become business-as-usual for most consumers, notes Holt Lunsford’s Moore and East Port’s Wall, where the public is discovering the not-so-reliable benefits of global versus local distribution and the associated delays in access to such consumer products as grocery and medical.
With opportunity, however, comes challenge—and the industrial sector is no exception. Such manufacturing and delivery issues also affect the materials and supplies needed to build new or renovate existing industrial space. Wall reveals that a July order for steel won’t appear on-site until next March at a higher cost and with minimal wiggle room for design changes. Quotas are another issue, she adds: “Manufacturers want to keep all of their customers, so they can only give us so much per month (think: wood inventory needed for a project) in order to serve everyone.”
Attracting and retaining customers is also an opportunity—and a challenge—among industrial property professionals, who must be flexible and, above all, creative thinkers. “There are several redevelopment plays that are satisfying a growing tenant base that desires a healthy mix of convenience and quality,” explains Moore. “You’re seeing more power, more artificial intelligence technology installed with TI packages, higher racking that requires thicker slabs to hold that weight, 100 percent air, and so on. But, depending upon the local municipality, a TI job that used to take two to three months might take six to eight months, and ground-up construction that might have taken a year is now more likely to take two years. The good news, however, is that there is ample capital for industrial in search of attractive yields.”
“There are several redevelopment plays that are satisfying a growing tenant base that desires a healthy mix of convenience and quality.”
Functional obsolescence also is a growing concern. Wall explains East Port is building zero carbon certified industrial buildings to differentiate its properties: “central heating so we have better control; better insulation for efficiency; and solar photovoltaics (PV) for renewable energy—none of which is typical for a warehouse. Obviously, it brings higher rents, but it also attracts most international companies that are stable and have corporate-level sustainability mandates.” But, she cautions, the long-term viability of older industrial properties remains a balancing act. Those industrial tracts that are small or land-locked may not have the turning radius needed for the ever-increasing size of semi-trailers, for instance. “And, what if our clients go to all-electric vehicles? Do we have the capacity for charging?” she asks.
The opportunity accelerated most recently is in managing certain subsectors in the market that have a long-term favorable outlook. Freezer/cooler space remains a hot commodity, and cold conversion, even in second-generation space, is now under consideration. Obviously, it’s not cookie-cutter, adds Conroy, and it requires a high level of expertise, especially in considering management oversight of ammonia systems in freezer/cooler buildings and the risk involved with maintaining these systems. “The increasing quantity of tenant and owner turns in this subsector creates a great opportunity whereby collaboration between asset services people and facility managers is more in play in property management, especially infill sites where users need to be able to serve the populations,” says Conroy.
Lewis also points to the opportunities afforded by vacant retail space. “In many cases, it’s very easily convertible to industrial space,” she explains. “You pop in some roll-up doors; you pull out the drop ceiling and take advantage of higher ceiling heights. There’s usually some sizable loading and parking areas. We converted one of our properties on a small scale and then leased some of those spaces quickly—with lots of interested activity on the others.”
The Greatest Challenge
The importance of collecting good data and measuring benchmarks cannot be overstated in any sector, industrial included. And, doing more with less—using drone technology to evaluate parking lots and roofs, for instance—will only intensify as demand in the industrial market continues to exceed supply. While all of the property professionals interviewed for this article are industrial-market successes with more than 100 years of combined experience, they say the one resource solely needed is talent: Imaginative problem-solvers, willing to learn the real estate behind industrial, who can speak the language of the owners and then roll out processes (in terms of deliverables) in a speedy manner.
“I would encourage young people in business to dive in and develop their talents in different ways,” advises CBRE’s Conroy. “When it comes down to it, the most valuable people in the [real estate] business are those who have good experience in a number of areas. Industrial is challenging, it’s fun and it gives you a lot more freedom and room for creative problem-solving than most professions. If you’re willing to work hard—and it’s very hard work—it’s a great career.”
ABOUT THE AUTHOR
Linda K. Monroe, a freelance writer and editorial project manager, was the former editorial director at BUILDINGS magazine from 1981-2008.