Special Report: Industrial Real Estate Seeing ‘Stagnation’ as Vacancies Rise

Special Report: Industrial Real Estate Seeing ‘Stagnation’ as Vacancies Rise

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Special Report: Industrial Real Estate Seeing ‘Stagnation’ as Vacancies RiseSpecial Report: Industrial Real Estate Seeing ‘Stagnation’ as Vacancies Rise

After years of record low vacancy rates and high net absorption, the industrial real estate market has hit a bit of a speed bump.

Patrick Barnes of Avison Young

“My initial one word would be ‘stagnation’ just given what’s happening in the debt market in the lack of transactions both from a lease and sales perspective,” Patrick Barnes, a principal at Avison Young specializing in investment sales, said. “Transactions are down.”

Industrial vacancy rates have steadily increased quarter after quarter, rising 57 basis points to 4.9% in the first quarter of this year, while leasing activity declined by 4.8%, according to Daum Commerical Real Estate.

“There’s a disconnect at this moment in time,” David Freitag, executive vice president and branch manager of Daum said. “I would say that the leasing activity in the central marketplace has definitely slowed, and tenants that are in the marketplace are typically looking for good value and functional properties.”

According to Luke Staubitz, an executive vice president at Kidder Mathews, this seller-buyer disconnect stems from one particular dilemma: sellers are holding on to 2022 peak pricing levels whereas buyers want prices to reflect today’s market.

Staubitz noted the one major exception to this notable nosedive is the $1 billion portfolio transfer of Blackstone industrial assets to Sawtelle-based Rexford Industrial Realty Inc. The combined portfolio was made up of 48 properties, totaling 3 million square feet, which sold for roughly $332 per square foot in March.

But some experts see upsides to a rising availability rate, noting the newfound flexibility gives tenants more freedom when sourcing new space and permits more new development activity as well.

“Now that vacancies have come up, and there’s more product on the market, it makes it a little bit better because there’re more buildings available when a company is going out and looking to lease,” Chris Jackson, chief executive of NAI Capital, said. “The flipside is we’ve had a slowdown in the economy.”

NAI Capital Chief Executive Chris Jackson

For Jackson, this dramatic slowdown is likely a result of an amalgamation of factors – including high interest rates, the nearing presidential election, the Measure ULA transfer tax, as well as overall market uncertainty.

Steps landlords are taking

With vacancy rates rising and leasing activity down, more and more industrial developers are upgrading their facilities to appeal to a wider tenant base and maintain healthy occupancy.

“There’s nothing to be ashamed about painting a building. It adds a lot of vibrancy. There are capital expenditures that are spent on the building,” Brian Good, chief executive of private lender iBorrow, said. “I think the whole goal is to attract a tenant that can sign a lease. That’s the whole goal. And when your vacancy rates are 5% or less, you don’t really have to do much to attract that right tenant.”

Brian Good, chief executive of iBorrow

Santa Monica-based BLT Enterprises, for example, reports zero vacancies in its entire 2.5 million square-foot industrial portfolio and recently signed long-term lease extensions with tenants such as Frito Lay and FedEx.

“On the industrial side, you need to have fresh new offices and bathrooms and locker rooms,” Rob Solomon, president of BLT Enterprises, said. “If you can have an outdoor area for lunch, that’s helpful for sure. (These are) a lot of things that we’ve done, as well as LED upgrades for lighting in warehouses. (We’ve added) maternity rooms and upgraded facilities as well.

BLT Enterprises President Rob Solomon

“The other thing that we’re looking at, and spending time at figuring out how to make work, is the sustainability side,” Solomon added. “Electric vehicle charging stations and battery power.”

Although many experts think green features don’t currently impact leasing decisions, others are pioneering the wave, including Prologis, which launched a 96-outlet charging depot at one of its trucking warehouses in Torrance last month.

Keeping costs down

But while some landlords are refurbishing properties to draw in new customers, others think the most attractive assets, at least from a tenant standpoint, are the ones that minimize company expenditures.

“Our business goes through cycles,” Freitag said. “We’re now in a cycle where we have to be very proactive about giving guidance to our clients and making sure that the buildings that we are offering for lease or sale are very marketable.”

David Freitag, executive vice president of Daum Commercial Real Estate

“I think we’re seeing more concessions in the market than we ever have,” Barnes added. “Two buildings that look the same – have a similar truck courtyard size or distance, doors – there are a lot fewer uses that are more specific about that ratio, as long as the economic numbers fit. I think it really goes back to what’s the best deal that they can make.”

Solomon said BLT has been reevaluating some of its own rental rates as lease expirations are creeping up by assessing fair values in a changing marketplace.

“When we do have leases roll, it’s getting in front of your tenants early on in the process, and for us, not trying to get every last penny out of a deal,” he said. “Because I think as vacancies are rising, don’t anchor your expectations to the landlord of a deal that was signed a year ago at the high watermark.”

Looking ahead, experts suspect that transaction velocity will increase as interest rates decrease and price expectations start to align between parties.

Luke Staubitz, executive vice president at Kidder Matthews

“We’re starting to see more and more lease transactions consummate because landlords have adjusted their expectations on rate and are now willing to make concessions that are bringing activity back into the market,” Staubitz said.

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