Industrial Leasing Insights
CCIMs share strategies for overcoming local leasing obstacles.
ommercial Investment Real Estate asked industrial real estate experts nationwide to share the biggest leasing challenges in their markets and strategies they are using to secure deals. Here’s what they said:
Kansas City, Mo.
Greatest challenge: The ownership-over-leasing paradigm shift among industrial owners that has led to lack of depth in the leasing market, stagnant lease rates for A and B properties, and rent declines for class C buildings.
Strategies: Encourage owners to spend on strategic improvements to their vacant buildings by upgrading lighting, painting warehouse walls, and making cosmetic office improvements. Remind owners that vacancy is their biggest enemy -- not an extra $.50 psf in annual rent. This is a hard lesson for owners to learn until they’ve faced 12 months of vacancy.
—Nathan F. Anderson, CCIM, SIOR, Harbinger Property Group
Fort Lauderdale, Fla.
Greatest challenge: Finding the right space for industrial users in a tight market.
Strategies: Leasing experts must be extremely efficient, thorough, and creative in their search for space. We represent Roofing Supply Group in Florida and were charged with finding them a new distribution location in Tampa, Fla., which has a very tight industrial market of 4 percent. Our initial search showed only three spaces that came close to meeting our client’s goals and time was of the essence to get this new location up and running. Over a period of weeks, there was a push on the client’s side to see more properties in move-in condition, so we were faced with having to both educate the client and go off the radar to find more options. We eventually took a run at a 40,000-sf freestanding warehouse that required extra build-out and time we didn’t have. The negotiations fell apart, and we found ourselves back at square one.
Standing outside this warehouse in frustration one day, I noticed the warehouse next door was similar, but with even better access and the right amount of build out. After taking a quick look around, and doing some digging, I discovered this was a perfect fit, and the tenant just happened to be moving. Also, our preexisting relationship with the owner’s broker helped facilitate the deal in a timely manner. The client was very happy and was able to take occupancy within their target date.
—Allen Lindow, CCIM, Brenner Real Estate Group
Greatest challenge: The availability, price, and value gaps between older, 1990s metal warehouse product in the 50,000-sf to 100,000-sf range and new construction.
Strategies: Older space rents in the mid-$2 psf NNN range, but lacks the amenities available in most industrial parks and class A buildings. New construction has top-quality amenities, including 24-foot or higher ceiling heights, but ranges from $4 psf to $5 psf NNN or more. To lease space in the market, real estate experts are redeveloping former manufacturing facilities and re-tenanting with smaller tenants who want amenities, but don’t want added expenses. Redevelopment is considerably cheaper and provides a very economical alternative to users who want value.
—Brian J. Young, CCIM, Grubb & Ellis/Furman Co.
Greatest challenge: Rising construction costs in the interim period between estimated costs and the actual start of new construction.
Strategies: A big question is when a project breaks ground and the costs are set, will the market bear the rents to achieve the owner’s desired returns? And, how much value engineering can be done to reduce costs without jeopardizing the project’s marketability? To counter this, increase the construction budget by 2 percent for each month during the interim period between estimated and actual costs.
To maintain a project’s marketability and achieve the owner’s desired returns, redefine lease terms and conditions. For instance, if the rents do not meet the desired returns during the initial term, shorten the term to limit the exposure to reduced returns over time, negotiate hard on the annual escalators, maintain tight control on operating expenses, and have the lease provide for the re-evaluation of the rental rate before any extension option is exercised. It is always better to lease space at lower-than-return rates over a short term than to carry vacant space over any term.
The mitigation to this dilemma is the negotiations to re-define the terms and conditions over a shorter period of time.
—Mary Hurley, CCIM, Pineloch Management Corp.
Greatest challenge: Low demand.
Strategies: Central Indiana currently boasts more than two dozen modern bulk warehouse space opportunities of 250,000 sf or more. Much of the product is speculative construction ranging from 400,000 sf up to 900,000 sf with cross-dock, flow-through configuration, ESFR fire protection, 32-foot to 36-foot ceiling clearance, expansion capability, ample trailer parking, and office areas built to suit the tenant. Further, virtually all spec bulk construction offers the maximum 10-year real estate tax abatement with the benefit passed through to the occupant as a market-driven incentive.
In spite of the ample space offerings, absorption during 1Q07 was only 866,000 sf. Vacancy at the end of 1Q07 was a healthy 6.4 percent; however, that was only a slight increase and available space totaled approximately 14,328,000 sf. Increased demand will bode well for occupants able to strike competitive deals and landlords aspiring to balance the market.
To achieve that brokers have to fine tune their marketing. Indiana’s governor has identified logistics as a target focus for economic development activities. Transportation, distribution, and logistics are key economic development initiatives with promotion by economic development officials of the "Crossroads of America" with access from Central Indiana to 75 percent of the U.S. population within a one-day truck drive. The second-largest FedEx hub in the world and the $1 billion project to build a new airport terminal and make other state-of-the-art improvements will continue to differentiate Indianapolis from other potential site alternatives for warehousing, distribution, and logistics operations.
—J. Jeffrey Castell, CCIM, SIOR, of Colliers Turley Martin Tucker