The Small Stuff
Condos and multitenant buildings meet the needs of a growing industrial market.
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.
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.
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.
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
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.
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.
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.
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.
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.”
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.
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.
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
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.
some cases low interest rates have driven user/owner demand, causing it
to overwhelm the market's available space, Grubb & Ellis reports.
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.
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.
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.”
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.
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.
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 .
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.
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.