NEW YORK, NY / ACCESSWIRE / August 2, 2022 / Each month 20+ of NAI Global's top industrial and logistics real estate experts participate in a conference call organized by Steve Pastor with NAI James E. Hanson in Teterboro, New Jersey. Pastor chairs NAI Global's Industrial Council. The group discusses trends in their respective markets, activity (both developers and tenants), rental rates and investment capitalization rates and related factors impacting the logistics industry in the U.S.
Photo: Gary Marsh
Here are some of the highlights from the June and July virtual conferences.
Industrial investment sales grow skittish as ‘retrading' activity becomes ubiquitous. Retrading is a phrase that describes property sellers or buyers (normally the later) changing terms of a transaction - typically the proposed sale price of a property, once the due diligence phase of a transaction commences. Retrading happens most often if a physical condition of a property is discovered, such as a leaky roof, to use an extreme example. Lately, however, 100% of the retrading activity shared by the NAI Global brokers during the July Logistics Conference Call is being driven by buyers that are reacting to rising interest rates and increased risks to buy industrial assets. For example, if the original return, or Cap Rate, based on the originally agreed upon price is around 5% or 5.5%, the increased cost of debt planned for the acquisition is putting the return rate/risk in the 6% to 7%+ range. Thus, buyers are going back to the sellers of these properties and seeking price reductions. In one instance, a buyer had to revisit a planned purchase (of a property) because its stock price was declining while interest rates were rising and as a result the Capitalization Rate will increase from the original 4.7% to something higher, yet the deal is still moving ahead.
One broker said that institutional investors are putting everything on hold 5-6 weeks to see how interest rates shake out.
There is upside to some of the retrading activity, according to some of the broker comments, and that is for sales that are dropped during the due diligence period - and most often to institutional investors, it is allowing local and usually smaller regional investors (who have been "boxed out") the opportunity to buy in what has been one of the most competitive environments for industrial property sales in history. (Sources:Meyer/New Jersey; Licht/New Jersey; Chambers/Atlanta; Black/Nashville; Pastor/New Jersey; Roth/Chicago; Armon/Reno)
Rental rate growth continues to be one of the main stories with industrial real estate. Walgreens signed a lease in the Orange County, NY market for $11 per-square-foot (psf) and most landlords are now asking $12 psf. Just two years ago typical asking rates for newly constructed industrial buildings were $7-8 psf. One broker said that rate hikes have been so aggressive that the brokers are being blamed for market conditions and even described the perception that "we're the enemy." In a painful example for one tenant, the company had been paying about $4.5 psf for a property and renewed at $6.50 a foot with 4% annual increases. That is a more than 30% increase from an existing rental agreement to the company's new lease and thereby adding an operational expense that will have to be passed on to customers, reduce corporate profits or some combination of each. In another example, a tenant in a multi-story and multi-tenanted building is currently paying $3.75 NNN and their rate is going to double when the term is due. The tenant is unhappy with the new building buyer, the broker and the market. Further, rent growth is motivating landlords to do shorter leases, because the capital markets are discounting deals associated with longer-term leases (5 vs. 10-year). This is at first contrarian, as normally investors like to buy property assets with long-term leases in place, for the stability and predictable income. However, with rates increasing so fast, investors fear that a rate locked in now for 10 years will leave money on the table, or income, for the second half if a 10-year deal were structured. Hence a recently completed, 50,000-square-foot lease completed in the Allentown PA market was for five years, per the landlord. Sources: Culberson/Albany; Licht/New Jersey; Caronna/Baltimore; Adams/Allentown)
Retailers are entering new markets and/or serving existing customers with warehouses instead of stores. In Oklahoma City, grocer The Kroger Co. (NYSE: KR) has a new 50,000-square-foot warehouse and ecommerce facility under construction with plans to offer food delivery services in the region similarly to the way "America's largest grocery retailer" expanded in Florida in 2021. The new facility is a hub-and-spoke model with primary service out of (hub) Dallas market. According to a company press release, the new "Oklahoma facility will serve as another geography for the company, bringing innovation and ecommerce to the area, extending the grocer's reach and ability to provide its customers anything, anytime, anywhere." (Source: Everett/Oklahoma City)
Delaware, which only has a total industrial inventory of approximately 32 million square feet for the entire state, is often a lower-cost alternative in the I-95 corridor for warehouse/distribution occupiers compared with southern New Jersey and southeastern Pennsylvania. Across several municipalities there are multiple new industrial development projects in the planning stages at the local land use level ranging from 127,500 to 1,420,000 square feet and for one other good reason- the industrial vacancy rate in Delaware is less than 1%. (Source: Hickey/Delaware)
A Reshoring example was shared, with New Jersey-based Greenland Technologies Holding Co. bringing home a portion of its manufacturing business in China to make electric forklifts and excavators at a new, 54,000-square-foot plant the company is building in East Baltimore County. (Source: Caronna/Baltimore)
Spurred by greater mobility and moving/relocation activity, as well as working from home during the pandemic, demand for Self Storage facilities across the U.S. has soared throughout 2021 and 2022. As such, Self Storage developers and operators continue to scour the U.S. for suitable new sites and facilities, and the search has brought them to tertiary markets in, among other places, Northern Indiana. In the South Bend and Elkhart areas of the state, older generation industrial buildings with 24-foot clear height ceilings that are being offered for sale have multiple offers from Self Storage developers and operators within days of listing. In most cases the developers try to keep the building shell and if they can, add to it. They are also utilizing perimeter areas of these industrial properties to lease outdoor storage space. In recent months, 8 industrial buildings have sold to Self Storage developers in that one submarket alone. (Source: Davey/Northern Indiana)
Demand is so tremendous for industrial inventory that an astounding 61 million square feet is under development in Dallas/Ft. Worth (45.5 million square feet has poured slabs and another 15.7 million is underway with dirt work, while 22% of that combined total is pre-leased); 35 million square feet is in some phase of development and construction in Atlanta, and there is 14 million square feet of potential development in Reno, which equals roughly 15% of the current inventory in that market at the moment. There is 3.7 million square feet under construction now in Reno. And tenant activity remains strong for three, 1-million-square-foot buildings for lease in Houston's port market. (Sources: Chambers/Atlanta; Stanzel/Dallas; Simon/Houston, Armon/Reno)
Supply chain disruption and material shortages are impacting industrial development projects and increasing construction costs. Among the materials are roofing materials and asphalt. Several of the participants cited builders that are scrambling to finish their projects with roofing as the greatest challenge. In the Baltimore area, roofing has increased 85% year-over-year and the cost to pave an acre of land for outdoor storage (with asphalt) has shot up from just over $100,000 a year ago to over $200,000 now.
In Georgia, there is a shortage of concrete. In Atlanta, there is a shortage of aggregate for concrete mix but not sand, while in Savannah, which also has sand but no aggregate, the state governor has struck a deal with Nova Scotia to ship aggregate to the city so work to expand Savannah's port can continue.
A Columbus, OH developer ordered switchgears for one of his projects last September and the equipment will not arrive until this September. Switchgears are one of the most common pieces of equipment at industrial, commercial and residential sites as they function to safeguard electrical connections and (mostly) intended to isolate electrical circuits.
Materials and gear shortages are encouraging institutional developers to begin stockpiling essential building materials (according to multiple sources from the call). (Sources: Royce/Tyson, VA; Caronna/Baltimore; Chambers/Atlanta; Osowski/Columbus)
About NAI Global
NAI Global is a leading global commercial real estate brokerage firm. NAI Global offices are leaders in their local markets and work in unison to provide clients with exceptional solutions to their commercial real estate needs. NAI Global has more than 300 offices strategically located throughout North America, Latin America, Europe, Africa and Asia Pacific, with over 5,100 local market professionals, managing in excess of 1.1 billion square feet of property and facilities. Annually, NAI Global completes in excess of $20 billion in commercial real estate transactions throughout the world. NAI Global provides a complete range of corporate and institutional real estate services, including brokerage and leasing, property and facilities management, real estate investment and capital market services, due diligence, global supply chain and logistics consulting and related advisory services. To learn more, visit www.naiglobal.com.
Gary Marsh, Marsh Marketing 415.999.3793 or [email protected]
Lindsay Fierro, NAI Global 212.405.2474 or [email protected]
SOURCE: NAI Global