Signs of Growth
It's not all bad out there. The summer was slower than we would like it to be for tenants, landlords, investors and owner/users alike but there were enough signs of new growth that we are remaining optimistic for the next two quarters. 3PL's are back in the market leasing new buildings, large corporates are signing renewals, owner/users are actually buying and institutional investors are quickly regaining confidence that they can now underwrite lease rates and exit caps.
Also, you'll be happy to know that Amazon is back! On their investor call they mentioned that they have increased their cash paid for property and other operating leases to $6.2 billion in the first six months of the year from about $5 billion during the same time in 2023. The company expects that effort to continue. "We're not done owning the regionalization of our fulfillment network," CEO Andy Jassy said on the call. Amazon has expanded same-day delivery to more than 120 metropolitan areas across the country, and has reached its fastest Prime delivery speeds in record this year, with more than 5 billion items arriving the same or next day globally — an increase of more than 30% year over year, according to a blog post this week by Udit Madan, vice president of Amazon Worldwide Operations.
Tenants
We continue to see a disparity in lease rates in So Cal. Subleases and landlords will low basis are undercutting the market on one side. On the other are developers with brand new properties completed that are getting healthy lease rates in exchange for an equally healthy dose of free rent. The comps below span from $1.25 GRS to $2.52 GRS for the same size building! Email me for the latest lease comps and I'd be happy to share them for your city, size and ceiling height.
Lease renewals are also hot right now now making up 75% of the leasing volume. We are doing a lot of blending on extending with clients who are installing warehouse automation and need their lease term to match their pack back period for their installation project.
We're seeing a lot of large corporations juggling 3PL contracts in order to use the 3PL to get them through a transition in their business strategy. We are helping customers with these contracts and weighing the benefits of insourcing versus outsourcing.
Landlords
Landlords are still as busy as ever working through their rent rolls and available property. Below are my Cliff Notes of the Prologis and Rexford quarterly earnings call with the pertinent information as it relates to the leasing market. * Prologis had their quarterly earnings call today. Lease proposal activity is up in quantity of proposals and in rental square feet, lease negotiation time from start to finish is down yet tenant retention is also down. Mixed signals but several green shoots. My favorite quotes from the call: + "Net absorption in the US, for example, was very low this quarter at just 27 million square feet. So while the macro landscape and supply chains continue to generate a need for space, we think it's prudent to expect continued headwinds on overall absorption over the next few quarters." + "This dynamic of available space intersecting with the desire for cost containment is what leads to lower absorption and is playing out at different rates across submarkets and customers." + "When considered alongside muted demand, we arrive at a view that the operating environment has only changed modestly in aggregate, and that demand is simply pushing out by a few quarters. The outcome of this may simply mean moving toward a long-term occupancy expectation more swiftly this year, which sets up for a better next year." + What does this mean? Make the most of this period of uneven activity if you are a tenant in a position to lock in lower rates while you can. The pipeline for new property deliveries will be lighter next year, and potentially the year after, meaning rates will stabilize, and go up. This last cycle taught me that rates change fast now. Investors are quick on the draw to raise and lower rates in response to economic activity. + Keep in mind Prologis is the largest owner of industrial property in the world, in the US and in California where most of my experience comes from. In the US they own 799 million SF, 3,824 buildings and 7,713 acres of land. They have 6,700 customers and have more insight into what 3PL's are doing than anyone else. Their top customers are Amazon, FedEx, DHL, GXO, Maersk, Home Depot, Geodis, CEVA, UPS and DSV. + In California, they own/manage 551 properties with 96% occupancy. 205 in New Jersey/New York, 329 in Chicago, 286 in the Bay Area, 242 in DFW, 235 in ATL, 223 in South Florida and 233 in Houston. + They are one of the only institutional investors who own in the <100,000 SF, 100,000-250,000 SF, 250,000-500,000 SF and >500,000 SF so they have visibility to most size segments. + When they signal, we listen, interpret and try to guide our clients accordingly. We can help guide you too.
* Rexford Industrial's Q2 2024 earnings call was this morning. They operate exclusively within the infill industrial market of Southern California which is the 4th largest and highest value market in the world, and largest and highest value market in the nation. + Total vacancy within infill So Cal Industrial averaging 3.9%. Oversupply risk is one of the lowest in the nation. Highest is Austin, then Savannah, Phoenix, Charleston, Inland Empire East (not considered infill, yet!), Atlanta and Dallas. Adding to that, that the total volatility is one of the lowest in the nation, roughly half of other major markets. + That said, more volatility is on the horizon. Though leasing is also accelerating modestly at the same time. + Market Rent Growth Quarter over Quarter Q1 2024 to Q2 2024 Greater LA: -1.5% Orange County: -0.5% Inland Empire West: -5.5% San Diego: 1.0% + Rexford's focus on smaller and medium size spaces within infill Southern California provide for a portfolio with superior tenant demand fundamentals, substantial opportunities to add value. With a portfolio of 26,000 SF average space size with a fundamentally different market than the big box investors. They focus on a larger (quantity) segment of the tenant market, with higher barrier to entry and an infill tenant base more stable through cycles compared to big box tenants. + Rexford continues to see a distinct bifurcation of performance of high quality, high functional smaller to medium size spaces versus older vintage, less functional, underutilized property. Part of the imbedded value in their portfolio is their value add property improvements strategy meaning that short term volatility is blunted by the creation of more functional property. + Tenants know rents will be up in the future and are acting accordingly by engaging earlier in the lease renewal process. + This is given a portfolio of 422 properties, including 722 buildings, 50 million square feet, over 1,600 customers.
Investors
Rob Guthrie, founder of Guthrie Development, joined me on the our podcast to share his experience in industrial real estate, specifically in condo conversions and value-add strategies. He discusses his background in real estate development and his specialization in small industrial buildings for sale. Rob emphasizes the importance of location and demographics when considering condo conversions and highlights the benefits of owning a small business property. He also talks about the challenges and pitfalls of condo conversions, including market fluctuations and the need for flexibility in financing and leasing options. We talk about the target market for these properties, the challenges of attracting institutional investors, and the value-add process for improving older properties. We also touch on design features, dealing with environmental issues, and advice for those interested in entering the industry. * Watch on Youtube here https://www.youtube.com/watch?v=q8wig_e-UCg&t=833s
https://www.youtube.com/watch?v=q8wig_e-UCg&t=833s
Owner/Users
Business owners that have purchased their industrial properties are called owner/users. This year has been the rise of the owner/user purchase. With rates starting to drop and a Fed rate cut forecast for next quarter, we should see this space heat up even more.
If you own your property and need to figure out how to re-organize your racking, your manufacturing line, or your supply chain, you'll enjoy this month's podcast episode with Michael Schulte of Intralog. He works with us to help you make the most of what you have and to plan out your next moves. * Listen or read the transcript here: https://smithcre.com/the-role-of-data-in-designing-storage-solutions-with-michael-schulte/ * Watch on Youtube here https://www.youtube.com/watch?v=c5R6lpO1ul8
https://www.youtube.com/watch?v=c5R6lpO1ul8&t=86s
Personal Investment
I'm in the market to purchase a multi-tenant industrial property in the range of 25,000-150,000 SF across the United States. If you are aware of an owner of a property who is reaching the point in their ownership, career or estate that is going to look to unload one of their properties, please make me aware and I am able to write an offer on the property without having to go to market. This goes for properties across the United States. Alternatively let me know if you would like to partner or invest as a limited partner within these types of investments.
Call to Action
We are working double time this summer as the bottoming of the market is increasing velocity. Tenants try to maximize concessions while they are present, and investors are increasingly re-entering the market with confidence to deploy capital. Reach out to Grant, Chris, or me to discuss how we can start adding value for you today.
Best Regards,
Justin
Justin Smith, SIOR
jbsmith@lee (mailto:jbsmith@lee-associates.com) irvine.com (mailto:jbsmith@leeirvine.com?subject=Newsletter%20Follow%20Up)
949.400.4786
Charts & visuals
