Industrial Insights – September 2022

Market Reports

While the Cat’s Away, The Mice Will Play

Many institutional investors and high net worth groups took the summer off to let some of the choppiness of the capital markets play out. Not all, but many. Repricing took place but in a lesser amount than anticipated.

Most investors’ favorite play in this past ramp-up is the mark-to-market strategy whereby they buy fully leased properties with below-market rents and lease expirations during their hold period. Now there is more negative leverage as a result of higher borrowing costs. There is slightly less confidence in what future rents will be. But only ever so slight.

Looking through the national data, we see that leasing figures are 60% above pre-pandemic figures with 11.6% year-over-year rent growth. Even with Amazon’s announcement that they are long on industrial property and likely to trim their portfolio and focus more on sales than leasing. Amazon represented + 15% of industrial leasing by square footage but not by the quantity of buildings. The leasing market is softer than the frenetic pace of 2021, but there are multiple offers on most functional properties in the largest markets throughout the country.

The bet right now is that industrial rent growth will keep climbing and that higher Net Operating Incomes (NOI’s) will be worth it. For tenant’s it is still a blessing just to be able to lock in your ideal space.

Tenants and Users

 

The above graphic is for a long-time client we work with across the country that we completed this month. This lease is indicative of the story going on across the country. Namely the leasing of newly built space (we call first generation space).

When you lease first-generation buildings, you must pay special attention to tenant improvements, infrastructure, and construction management. The building may have been meant for one tenant but could accommodate being split in half. Splitting a building in half means building out another office pod, a demizing wall, and electrical and sprinkler work. You’ll want to know if internet lines or fiber have already been run to the building. You’ll have to track construction progress (we do with you).

Weekly meetings are your friend to work through issues, track progress, and adjust plans. These weekly meetings are where the timeline, budget, and everyone’s expectations are hammered out so that the best collective outcome can be reached.

Permits, post permit revisions, and temporary certificates of occupancy will dictate some of the milestones on your path to completion and occupancy. Knowing upfront what permits are already on hand, the timing of the city (surprisingly 2.5-10 week turnaround times depending on the city and state), and factoring in how to get operational as soon as possible are all important.

You’ll need to thread the needle to ensure your tenant improvement allowance budget covers your cost, that the building is constructed as intended, and that you can move in before your lease expires.

Teamwork is paramount. The landlord’s team consists of their architect, contractor, project manager, and construction manager at a minimum. The tenant’s team consists of the leadership responsible for the project, often the general manager, IT, your conveyance integrator and/or racking vendor, and this guy.

Our biggest challenges these days are lead times on HVAC units, electrical gear, dock elevators, turnaround times at city planning departments, revised and increased pricing, and delivery/manufacture delays.

 

Market Reports

Media

  • Book #1
    • Industrial Intelligence, The Executive’s Guide for Making Informed Commercial Real Estate Decisions
  • Book #2
    • Industrial Leasing
      • I’ve decided to try to cover investments and leasing in one book and break them into two! That means this next one is about landlord leasing, and I’ll cover investments in the third book.
  • Podcast
    • Jason Miller, head of Michigan State University’s Supply Chain & Logistics program, was filmed yesterday and will be out next week. We talked about how looking at durable good production, new home construction (not starts), and Less than Truckload (LTL) tonnage are some of the lesser used metrics to follow to keep a better on the pulse of the economy and as it relates to industrial real estate. We belabored the labor shortage issue, parsed the need to rethink consumer demand vs supply when thinking about economic policy, and then covered steel and what steel production means for us and our buildings and the larger economy in 2022 & 2023.
    • Subscribe to the show or listen to individual episodes here

We’d love to catch up with you and brainstorm how we can make your goals come to life. You can book time with me at your convenience: https://calendly.com/industrialsmith/. Thank you!

Best Regards,

Justin Smith, SIOR              Grant LaBounty
jbsmith@leeirvine.com         glabounty@leeirvine.com

Chris Vassilian                     Jeannette Cano
cvassilian@leeirvine.com     jcano@leeirvine.com 

The above graphic is for a long-time client we work with across the country that we completed this month. This lease is indicative of the story going on across the country. Namely the leasing of newly built space (we call first generation space).

When you lease first-generation buildings, you must pay special attention to tenant improvements, infrastructure, and construction management. The building may have been meant for one tenant but could accommodate being split in half. Splitting a building in half means building out another office pod, a demizing wall, and electrical and sprinkler work. You’ll want to know if internet lines or fiber have already been run to the building. You’ll have to track construction progress (we do with you).

Weekly meetings are your friend to work through issues, track progress, and adjust plans. These weekly meetings are where the timeline, budget, and everyone’s expectations are hammered out so that the best collective outcome can be reached.

Permits, post permit revisions, and temporary certificates of occupancy will dictate some of the milestones on your path to completion and occupancy. Knowing upfront what permits are already on hand, the timing of the city (surprisingly 2.5-10 week turnaround times depending on the city and state), and factoring in how to get operational as soon as possible are all important.

You’ll need to thread the needle to ensure your tenant improvement allowance budget covers your cost, that the building is constructed as intended, and that you can move in before your lease expires.

Teamwork is paramount. The landlord’s team consists of their architect, contractor, project manager, and construction manager at a minimum. The tenant’s team consists of the leadership responsible for the project, often the general manager, IT, your conveyance integrator and/or racking vendor, and this guy.

Our biggest challenges these days are lead times on HVAC units, electrical gear, dock elevators, turnaround times at city planning departments, revised and increased pricing, and delivery/manufacture delays.

 

Market Reports

Media

  • Book #1
    • Industrial Intelligence, The Executive’s Guide for Making Informed Commercial Real Estate Decisions
  • Book #2
    • Industrial Leasing
      • I’ve decided to try to cover investments and leasing in one book and break them into two! That means this next one is about landlord leasing, and I’ll cover investments in the third book.
  • Podcast
    • Jason Miller, head of Michigan State University’s Supply Chain & Logistics program, was filmed yesterday and will be out next week. We talked about how looking at durable good production, new home construction (not starts), and Less than Truckload (LTL) tonnage are some of the lesser used metrics to follow to keep a better on the pulse of the economy and as it relates to industrial real estate. We belabored the labor shortage issue, parsed the need to rethink consumer demand vs supply when thinking about economic policy, and then covered steel and what steel production means for us and our buildings and the larger economy in 2022 & 2023.
    • Subscribe to the show or listen to individual episodes here

We’d love to catch up with you and brainstorm how we can make your goals come to life. You can book time with me at your convenience: https://calendly.com/industrialsmith/. Thank you!

Best Regards,

Justin Smith, SIOR              Grant LaBounty
jbsmith@leeirvine.com         glabounty@leeirvine.com

Chris Vassilian                     Jeannette Cano
cvassilian@leeirvine.com     jcano@leeirvine.com