Multifamily

The Small Stuff

Condos and multitenant buildings meet the needs of a growing industrial market.

By Carolyn Bilsky |

In California's Ventura and northern Los Angeles counties, industrial properties 25,000 square feet and under frequently sell before they even go on the market, says Joe Jusko, a principal at Lee & Associates in Calabasas, Calif. “Availabilities come up very rarely, and when they do it's mostly word of mouth. The guy next door will tell you he's selling his property without formally marketing it,” he says.

The Los Angeles area's market conditions make marketing unnecessary for small-industrial-space sellers. The county's average asking lease rate, 53 cents per square foot per month and net absorption, more than 4.6 million sf, are at their highest levels since 1Q99, according to CB Richard Ellis. “The properties are very popular and we have very low vacancy. We have a lack of availability and we are out of land [to build on],” Jusko says.

What's happening in this market isn't that unusual. In fact, despite the slumps seen in other commercial property markets last year, the U.S. industrial market appears to be in the midst of an upswing, CB Richard Ellis reports. Areas of high industrial property activity have shown increased construction and high sales levels. Some markets are quickly improving, while others slowly are catching up. Market vacancies are lowest in Los Angeles, 2.9 percent, Bakersfield, Calif., 4 percent, Riverside-San Bernadino, Calif., 5.6 percent, and South Bend, Ind., 5.9 percent, and several Canadian cities, according to Grubb & Ellis.

Small industrial properties, in particular, are garnering attention in these markets. These spaces are ideal for small businesses that make up the lifeblood of the American economy. Small companies account for 99.7 percent of all employers and employ half of all private-sector workers, reports the U.S. Small Business Administration.

Space Users

The companies occupying these spaces span the gamut of types and reasons for usage. Some spaces are leased or bought by traditional users. In Montgomery, Ala., for example, “most users are local or regional distributors, subcontractors, and service industry jobbers,” says Michael G. Griffin, CCIM, director of corporate services at Aronov Realty Brokerage in Montgomery, where the majority of the industrial market is 25,000 sf and under.

Other markets see users with more unique needs. In Naples, Fla., industrial space not only is used by small companies, but by private individuals storing their boats, recreational vehicles, and pricey automobiles as well, reports Bruce S. Preble, CCIM, a broker associate at Welsh Co. Florida in Naples.

Often companies using industrial space “are supporting an existing industry cluster in the region,” says Jim Haguewood, CCIM, Clallam County, Wash., economic development council director. In Haguewood's market the cluster centers around the marine and small manufacturing industries.

Elkhart, Ind., has one of the highest per capita manufacturing employment rates in the country, according to Steven W. Pettit, CCIM, senior associate broker with CB Richard Ellis in Goshen, Ind. “Particularly active is the RV industry ... in addition to the RV market, we have numerous boat manufacturers, manufactured-housing companies, truck box manufacturers, and cabinet manufacturers,” he says.

While the RV companies need spaces typically larger than 25,000 sf, the RV company suppliers, as well as auto industry manufacturers, thrive in smaller spaces, Pettit says.

In Demand

Combined with the current low interest rates, the industrial sector's rosy outlook is piquing the interest of many small companies that previously leased industrial property, Grubb & Ellis reports. With new, more-affordable financing options available, small businesses are capitalizing on the opportunity to buy.

For example, in Cincinnati , “The small industrial market has remained fairly healthy during the down economic market of recent years,” reports Paul Schmerge, vice president of Cincinnati Commercial Realtors. “The purchase market has been particularly strong. As long as there are locally owned and operated businesses there will be a buy/sell market. However, as business becomes more national and global in scope, leasing will continue to play a larger role. Large corporations with merely a local or regional operation in a city do not want a large portfolio of owned properties across the country. They need flexibility and reduced liabilities, which leasing offers.”

On the West Coast, the rules of supply and demand have come into play, Jusko says. High demand for small industrial properties is driving up sale prices. Small businesses in Los Angeles County follow a common scenario, he notes. Start-up companies find early success designing and manufacturing their products out of the owner's garage. The next natural step is to buy a small industrial space.

“Our market has a very high preponderance of small businesses. Studies in Ventura County and northern Los Angeles County show that 70 to 75 percent of small industrial businesses have less than 25 to 30 employees. So, properties that are 15,000 sf to 25,000 sf are our bread and butter — they are 70 percent of our market,” he says.

Sales prices on small properties in the Albuquerque, N.M., market are being driven up by demand as well, reports David Genrich, CCIM, SIOR, principal of Real Estate Advisors. “With the prevailing interest rates, small local and regional users express a strong preference to buy instead of lease. This preference to purchase, coupled with growing construction [costs] in the past year, has dramatically pushed up both asking and closing prices for small industrial product.”

Owning Their Own

Small industrial properties can be profitable investments for user/owners. But until recently, many entrepreneurs couldn't afford to buy their own space. Relatively low interest rates and rising investment potential have made buying a more economical choice than leasing.

In some cases low interest rates have driven user/owner demand, causing it to overwhelm the market's available space, Grubb & Ellis reports.

In some markets the buyers already occupy the property. “Most of the businesses we see buying these industrial condominiums are tenants that mainly have been in a position to lease prior to the historically low interest rates and aggressive low down payment financing offered by many banks,” reports Daniel G. Buhrmann, CCIM, an industrial adviser with Grubb & Ellis/NCG in Sparks, Nev.

“There are a number of existing projects in our area, and most of them are owner occupied,” Jusko says of Ventura and northern Los Angeles counties. SBA loans that allow 10 percent down and 90 percent financing give small companies access to buying like never before, he reports.

The cheaper-to-own trend extends to Albany, N.Y., as well reports Joseph Larkin, CCIM, SIOR, of Larkin Commercial Properties.

“We do a lease vs. own analysis every few years and 90 percent of the time it is less expensive to own,” Larkin says. “While rental rates are bound to go down soon, right now the cost of ownership is cheaper than the cost of occupancy.”

Property Choices

Depending on the market, buyers can choose from different property types. For example, flex space, pure warehouses, industrial condominiums, and free-standing properties all may be available, but some are more common in specific market areas than others.

In markets like Albany or Montgomery, land availability isn't a problem, so small companies have the option of personalizing a property to suit their needs. “Most businesses choose to build new facilities or opt for a build-to-suit,” Griffin says.

In markets where undeveloped land is less abundant, industrial condominiums are a more popular option for users interested in purchasing. In the northern Nevada market, “Increasing construction costs kept several developers ... focused on speculative multitenant condominium projects for sale or for lease to take advantage of the existing capital market — strong demand from first-time commercial buyers,” Buhrmann says.

Industrial condominiums are gaining popularity in other urban markets as well. Orlando, Naples, Minneapolis, St. Paul, Minn., and Silicon Valley, Calif., experienced recent industrial condominium development. Although this property type has not spread to all market areas, the industrial condominium business appears to have some staying power at least until interest rates rise, says David Murphy, CCIM, MAI, first vice president of CB Richard Ellis Industrial Properties in Orlando .

Some small businesses just want space that is versatile, says Rob Renaud, vice president and director of corporate services for GVA Devencore in Toronto . “Users are looking for properties that are malleable with a variety of uses: warehouse, distribution, office, service depot, or retail.” Industrial flex space can be any combination of office, retail, show room, and industrial, and allows industrial space users more flexibility. Jusko estimates that his buyers designate 10 percent to 20 percent of their space as flex space. “What they do with it ranges from A to Z,” he says.

Whatever the shape and location of the property, interest in small industrial properties shows no signs of waning. The flexibility and range of uses small industrial spaces offer indicate that their current popularity isn't just a trend. As the economy continues to improve, so too will the industrial market.