Written by: John Dobrott, President – Industrial
Industrial real estate led the commercial real estate industry out of the great recession and continues to show unprecedented demand and record setting growth. Investor demand has followed to transition industrial real estate from the unglamorous investment made for portfolio balance into the darling of the industry.
What’s driving this demand? The user side is fairly obvious. E-Commerce has changed everything. The absorption from Amazon alone is staggering. E-Commerce pervades into nearly all industrial uses. Something e-commerce, whether direct or indirect, goes in or out of most warehouses these days. Even manufacturing, the old mainstay of industrial real estate, has reemerged in many markets. All this inures to the new found appeal of industrial real estate to institutional investors. Yet there’s more to it. Industrial real estate is a reliable performer with the new luster of income growth.
It always comes down to supply and demand. For all this surging demand, it’s been difficult to generate adequate supply, particularly in the coastal markets. In addition to a dwindling supply of well-located sites, more regulation, rising construction costs, new or increased fees and the NIMBYs have all thwarted supply. Hence the curve pushes up and the users have stepped up to pay industrial rent increases heretofore thought impossible.
In the old industry model, users didn’t have the latitude to step up to larger rents. Industrial businesses had always been operated on tight margins and rent was a significant part of overhead. Warehouses were static operations with few employees. Goods didn’t fly in and out at the furious pace they do now. Transportation wasn’t nearly as complicated or costly. I’m not saying rent isn’t insignificant nowadays. It is. However, as the cost to develop industrial real estate has gone up in good locations, users have not hesitated to pay up.
Another institutional appeal is that these properties are very difficult to replace. They are sophisticated with enormous tenant investment in conveyance systems. All the more likely to result in lease term renewals. The CapEx associated with lease renewal or turnover is much lower than any other commercial real estate segment. Nor are these properties old smokestack industrial. They are not environmental liabilities or neglected facilities. These are credit tenants, desirous of a clean business park setting with pride of tenancy or ownership.