Archives for March 2022

The gathering optimism over a robust return to the office hit a stumbling block in the closing days of 2021. But indicators so far point to a long-awaited relief from the grip of COVID-19 and a resurgence of the optimism that will ultimately fill our office buildings once more.

Of course, it’s hard to predict at this juncture exactly what lurks beyond the next corner in terms of new variant strains of the virus. But this we know: the previous threats—the delta and omicron variants—amounted to worrisome but ultimately small speed bumps, and occupancy numbers slowed, but did not stop.

We also know that SIOR members have been at their tenants’ side throughout the ups and downs of COVID-19 and its variants. All the way, they’ve been helping their clients craft a return to the office that will ensure both the safety of their employees and the benefits that office occupancy brings—the collaboration, the camaraderie, and the face-to-face strategizing.

Indeed, as we reported in the Winter 2021 edition of SIOR Report, while the industrial market remains blazing hot, the fortunes of the office market, the focus of this article, have been strapped to COVID-19-related issues. Could that finally be changing?

JLL, in its January 2022 Office Market Outlook, indicates that it might be: “The U.S. office market registered positive net absorption for the first time since the onset of COVID-19 during the fourth quarter. Despite the delta and omicron variants disrupting many elements of daily life and return-to-office policies still evolving, leasing velocity increased by 9.2 percent in Q4, lifting full-year leasing volume 14.6 percent above 2020 levels, while sublease space stabilized and vacancy plateaued.”

TAILORING SOLUTIONS TO THE NEED

It comes as no surprise that responses to COVID-19 to date have been varied, based on the specific needs of the tenant and individual states’ approaches to the latest virus iterations. (As just one example of the helter-skelter nature of the pandemic, in November, New York Governor Kathy Hochul called for a general return to work by the new year. Within weeks, in the face of rising omicron threats, the state mandated full masks in public places.)

The choices tenants are making include–obviously–holding pat with their current footprint or cutting back on their holdings until there’s more clarity on the pandemic. “Shorter lease terms allow corporate occupiers to buy some time until long-term decisions can be made,” says Michael Feuerman, SIOR, senior vice president with Berger Commercial Realty | CORFAC International.

Other tenants have opted for more outlier strategies, either shuttering their spaces completely or actually expanding for social distancing or planned growth. All the brokers we spoke with said these are the two least common options.

Whatever path they choose, growing trends such as hybrid work models are bound to play a role. “There’s a general consensus among my clients that they can maintain a workforce remotely, but they can’t grow and properly train remotely,” says the South Florida-based Feuerman. He points to the hit such important factors as mentorship and culture take when people are scattered to the winds. “Growth is inhibited.”

But money speaks, and immediate necessity often trumps long-range strategy. Downsizing and shorter lease terms, while immediately beneficial to the tenant’s pocketbook, are also problematic long-term, for the landlord as much as for the tenant.

“When lease renewal time arrives, the landlord has the negotiation leverage, and the tenant is in a Catch-22,” says Dallas-based Nora Hogan, SIOR, the principal of Tenant Advisory and Workplace Solutions for Transwestern. “They either accept the economic terms and an amendment to the lease that will not have very favorable clauses, or they disrupt operations and start the costly and time-consuming process of relocation.”

Shorter term leases also threaten the landlord’s solvency. “We’re working with two sets of expectations,” she says. “The tenant believes the market is soft and rental rates should decrease. But then there’s the reality of the landlord’s lender requirements. Often landlords’ proforma models demonstrate that short-term decisions may adversely affect the valuation of the building.”

There is a premium tenants often have to pay to go short-term, “and we let them know that there’s a high likelihood of rent reduction if they commit longer-term,” says Feuerman. “But because these are short-term leases, the financial impact is minimal. In other words, for a year or two, or even three, tenants don’t seem to mind paying a rent premium to get the flexibility they’re seeking while they wait out the effects of the pandemic on the workforce dynamics.”

Shorter terms might be an expedient for the tenant, and at least the landlord keeps space occupied. But what of the above-mentioned outliers—those occupants that shed their spaces entirely in favor of a fully remote work strategy? Are office tenants in those cases being penny wise and pound foolish? They might be.

Jeffrey D’Amore, SIOR, offers a case in point. The executive director and real estate broker for Cushman & Wakefield | Pyramid Brokerage Company in Albany, N.Y., tells of a large insurance client that pulled the plug on both a new lease and a local 5,000-square-foot space they already occupied, all in favor of remote working.

While they may be saving serious capital in the short run, such decisions might be “rash,” he says. “So far, this tenant has no interest in re-engaging that landlord and taking back their old space. But I wouldn’t be surprised if they eventually try to take the space back or downsize into new offices.”

The problem is that, as the JLL numbers prove, there is a push to return to the office, and D’Amore reports a lot of eyes on that vacated space. “Tenants who’ve abandoned their spaces will be scrambling to find offices,” he says. “This client specifically spent a lot of money on their buildout and had beautiful offices. It won’t be available to them unless they act soon.”

THE TI ISSUE

Of course, on the other side of the spectrum, long-term deals come with benefits, such as richer tenant improvement (TI) allowances. But increasingly, tenants are fitting out those long-term leases with termination clauses, says D’Amore.

“Even on 10-year deals, landlords are protecting themselves with stepped up measures to lessen that impact, much more than was common prior to 2020,” he says. “These protections might include making the tenant responsible for unamortized improvements and brokerage commissions, and penalties in base-rent payments in excess of six months.”

But again, tenants trying to maximize flexibility in the face of ongoing unknowns may nevertheless eschew the benefits of the long term. “A long-term lease placed on the sublease market is never cost-effective,” says Hogan. “If a tenant can’t see the future clearly, they should pay the extra for a short-term lease and accept the limitations of a space that may not be perfect.”

It might be easier to live with spaces that are less than perfect, given the rising cost of construction materials, which puts the squeeze on landlords’ ability to deliver on TIs. Jay Cobble, SIOR, the Knoxville, Tenn.-based partner and principal broker for Providence Commercial Real Estate, reports that construction prices have jumped from $20 to $60 a foot in his local market.

“Landlords are stuck,” he says, “because while construction costs are high, lease rates haven’t gone up with them. It just doesn’t pencil out. Proposals I’m getting from landlords say they can make TIs work on a seven- or a 10-year lease. But tenants don’t even want to do a five-year.”

In what Cobble describes as a small market, leasing trends take two forms–either local decisions imposed by distant corporate decision makers or the more seat-of-their pants activity of small local tenants. “The mom-and-pops are moving forward, as much as possible, with construction costs being what they are. Meanwhile, the corporate groups are actively looking over their balance sheets and cutting expenses by reducing their footprint.”

SERVICE AT THE CENTER OF FLEXIBILITY

At the end of the day, the client’s preference rules. CRE experts we chatted with say that, as always, their responsibility is to help clients make those preferences as informed as possible. It’s called service, and, as Cobble explains, service is made up of “communication and relationships. I try to stay connected to national and local trends to help my clients make better decisions.” He includes in his sources SIOR Report (of course), market trend data, and even furniture and architectural vendors who “have enormous research departments and are always helping their clients figure out solutions for social distancing.”

“We can’t make these decisions for our clients,” says Feuerman. “What we can do is help guide them through the questions that have arisen during the pandemic, such as how many employees might be coming back and if they’ll be using a combination of office and remote work.”

D’Amore agrees. “My job, the job of any SIOR, is to provide the guidance that will help our clients navigate their options,” he says. “We want them to see all of the possible opportunities that are available to them with the goal of both negotiating the most favorable terms and providing maximum flexibility when it comes to their space requirements and overall lease obligations.”

The office market is in a state of flux right now, and predictions of future occupancy remain somewhat cloudy, at least for the moment. If there is any clarity or consistency in the marketplace, it comes in the strong advisory relationships SIOR members have forged with their tenants.

Some things never change.

Source: “A Shorter Lease On CRE“

Even if CRE businesses aren’t under SEC disclosure requirements, they may be doing business with companies that are, and that’s going to hurt.

After years of discussions and hints, the Securities and Exchange Commission finally released its proposed environmental disclosure rule for public company reporting. They include greenhouse gas emissions; how the company governs and manages climate-related risks; actual or likely material impacts on business, strategy, and outlook; financial statement metrics; and information about climate-related goals and any transition plans.

Getting the information and making the determinations will be a challenge for any sized company that comes under the SEC’s purview. But there are significant questions about who is responsible for gathering and reporting information from commercial real estate facilities.

“This is a prime example of market participants like ESG investors and large companies (appropriately) acting like the adults in the room,” Blaine Townsend, executive vice president as well as director of sustainable, responsible, and impact investing at wealth and investment management firm Bailard, said in a statement to GlobeSt.com.

“My initial reaction is that the SEC essentially gave ESG investors everything they requested on enhanced climate-change disclosures,” Michael Biles, a partner in King & Spalding’s securities enforcement and regulation practice, tells GlobeSt.com. He adds that companies will have to disclose “detailed information about how their business impacts climate-change” in their annual 10-Ks or registration statements.

“The proposed rules will be eye-opening for most registrants, particularly those that do not operate in energy or heavy industrial space and thus probably did not think that they needed to monitor or report their GHG emissions,” Biles adds.

Verdantix, an ESG research and advisory firm, estimated that the changes will run $6.7 billion on consulting over the next three years and “pose an additional challenge” for companies that don’t have the “internal and external experts to implement a robust management system for SEC climate rule disclosures.”

“[T]he real question is how far will the requirements go?” Thomas Gorman, a partner in the law firm Dorsey & Whitney, said in a statement sent by the firm to GlobeSt.com. “The answer is in probability not as far as some foreign regulators such as the Hong Kong securities commission and the Monetary Authority of Singapore who are leaders in this area have gone. There will surely be a beginning, however, which in probability will be followed by lawsuits.”

What gets sticky is who will have to report what in CRE. Companies under SEC regulations will need data and analysis to even make the determination of whether there are material impacts on business, strategies, and outlooks, let report specifics.

“Under the proposed rules, all registrants must disclose their Scope 1 emissions—i.e., ‘direct GHG emissions from operations that are owned or controlled by a registrant’—and Scope 2 emissions—i.e., ‘emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant,’” Biles says.

But lines get blurred. “For example, if a software company that rents office space owned by an insurance company, who discloses the emissions caused by the electricity used in the office building, the software company or the insurance company?” says Biles. “I don’t know the answer to that question.”

What if commercial tenants want environmental information to do their reporting and that becomes a requirement for a landlord that, even if used to office or industrial leasing, doesn’t have the necessary data? Or what if landlords will feel increasing pressure to provide bundled services? What are the landlord’s obligations then?

This could get complicated and sticky quickly.

Source: “New SEC Environmental Disclosure Rules Will Hit CRE Surprisingly Hard“

This ‘Bad News, Good News’ Story is Far From Over

Supply chain disruptions have had a direct impact on CRE—not only in port cities, but in any market that relies heavily on warehouses; space has become scarce and rental rates have spiked. In response, expert brokers have had to become more creative and more assertive—and they are advising clients to do the same.

“We’ve seen the single biggest impact as just a further delay in the process of supply creation, and particularly on the industrial side of the market right now that lack of supplies is what is driving really, really strong rental rate growth,” says Gabriel Silverstein, SIOR, managing director, SVN | Angelic, Austin, Texas.

There is a lot of money available for construction and high interest in creating new supply, he says, but there are also two things holding it back: municipalities are possibly moving more slowly than ever, and, of course, the supply chain.

“When somebody tells you that you will have a 56-week [wait] for roof trusses and an industrial facility usually builds in 40 weeks, that’s a pretty big material change,” says Silverstein. “It not only delays the completion of some of that new supply, but it also drives up the cost basis—not just because materials are higher and in demand, but also because of carrying costs. With an extra four months there’s a significant cost in interest, land; that’s real money.”

“It has created significantly more demand for both warehousing space and yard space for storage of trailers, containers and chassis,” adds Christopher Sheehan, SIOR, senior executive vice president at Colliers in El Segundo, Calif. “Clients are complaining about getting the inventory they need to make their product and/or to sell their product. Lack of labor is also negatively impacting our clients’ ability to provide their goods and services.”

Of course, ports are bearing a huge brunt of the burden. “The supply chain issues and increased demand for warehousing have placed tremendous pressure on our industrial availability, with a current vacancy rate of 0.6% and some of the highest lease rates in North America,” reports Baktash Kasraei, SIOR, vice president with JLL in Vancouver, Britsh Columbia, the largest port in Canada. “Occupiers are seeing 200% rental increases from five years ago.”

And Anthony Bergeman, SIOR, executive vice president/principal, DAUM Commercial Real Estate Services, Gardena, Calif., who works the Los Angeles ports and Long Beach logistics markets, is seeing a similar picture. “Vacancies have always been historically low,” he says. “Now it’s just magnified because everything has jumped up so quickly.”

He says he’s seeing a vacancy rate of less than 1% vacancy, with 45% “bumps” as pretty standard in rent escalations, and the rare new developments are pre-leased during construction—“even out to the Inland Empire.” Bidding wars are common, he adds, with tenants willing to pay more for space near the ports.

There’s also a premium for functional space, which is lacking in the market. “There’s only a finite amount, and that will be the market for the foreseeable future,” he says.

ADDRESSING THE ISSUES

One of the frustrations facing CRE pros, notes Bergeman, is that there’s nothing they can do to change the market; it is fully in-filled and fully built out, and new product can’t be created. He tells tenants they have to start looking as early as possible and pay what the market is at that time. “I’ve seen leases inked, and by the time they move in it’s already under market,” he notes. Ideally, a tenant will have an option, “So exercise it,” he advises. If they don’t, “they should engage as soon as they can—a year out, 18 months, however long the landlord lets them.”

Sheehan takes a similar approach. “When we are representing tenants, we tell them that they need to move very quickly because if they are slow in responding in negotiations, it is likely that they will miss the deal because someone else will take it,” he says.

Landlords, Sheehan adds, require different advice depending on their business plan and motivations. “If they are very aggressive, we will advise them to move slowly to create more bidders and hopefully bid up the lease rate,” he shares. “If they are more occupancy-oriented and not trying to make every last penny, we will pick the most qualified prospective tenant and try to engage them in exclusive negotiations.”

The bottom line, he says, is that “We are trying to get creative in finding the needed space and moving quickly so we provide all the current options available in the market in a timely manner—so we can put our clients in the best position to win a deal. We’re also being more aggressive in communicating with the larger landlords in the market, so we can find out about pending availabilities before they hit the market.”

Kasraie says he spends more time educating clients about the current conditions. “Site selection has shifted from evaluating many options to finding one or two off-market options and executing quickly,” he says.

He adds that he is actively engaging clients much earlier in the lease cycle—24 months or more in advance—to proactively forecast needs and engage landlords and developers. He advises clients to “be flexible and act decisively. For buyers and tenants, gone are the days of lengthy RFPs and long due diligence periods.”

Kasraie notes he is also much more involved in the development cycle, from land acquisition to pre-construction leasing.

“We challenge people to look at new suppliers; that includes even new vendors who might be able to look for new suppliers,” says Silverstein. “In a project we’re looking at now in Austin, they have introduced a new general contractor to the developer they previously didn’t know. That contractor is in the process of doing a building in Dallas for Prologis; they have some credibility, and in that deal, they’ve been able to start putting up roof trusses in a matter of only 20 weeks because they found a factory that would make them.”

Silverstein says he personally visited the factory in Mexico. “When the first shipment came to Dallas, just to be sure of the quality, they physically X-rayed them, and Prologis was thrilled,” he reports. “This was a small- to mid-sized contractor people would not necessarily have known. Now we can potentially do the same thing on a project in place already.”

Silverstein says he met the company through industry connections and struck up a dialogue. “On the surface, I had no need at the time for them, but all of a sudden we continued to have conversations, I really liked them, and they’ve been really helpful introducing me to other people.” This all began, he relates, through his contacts with other SIORs. “That network of people that many of us try to maintain, and built over the years, has suddenly become really important.”

NO RELIEF IN SIGHT?

Despite well-publicized efforts by the federal government to smooth the flow of goods, there is little optimism among SIORs that things will improve—at least in the short-term. “I’m pretty sure you can’t use ‘improvement’ and ‘government’ in the same sentence,” says Silverstein. “There are many supply chain problems we have by the government—travel restrictions, trade restrictions, and restrictions on employees and employers.” Pent-up demand due to COVID-19, he adds, “did not cause the problem; it highlights it.”

Bergeman also fails to see improvement. “The main thing is we can’t get enough chassis; we have more hours (for the ports to be open), but also a lack of drivers. We have these multiple negative factors.”

He sees the problem as one of longer term, with a market under-supplied with modern product. “Until it’s all fully redeveloped, it’s not going to get better anytime soon,” he declares.

Unlike these other ports, the Port of Vancouver already operates 24 hours a day, so no government intervention has been necessary, says Kasraei. As for how long the supply chain problem will last, he sees a mixed picture.

“There is a short- to medium-term component due to pent-up demand and supply chain issues, which will be addressed in the coming 12-24 months, but there are also systematic changes from a leap forward in e-commerce adoption to levels that were not expected until 2023-2024. Developers have not had the time or the land supply to respond to [this leap] with an increase in the supply of logistics buildings,” he shares. “International trade tensions have also harmed just-in-time logistics, leading to inefficiencies that require higher inventory levels and reshoring of some manufacturing capacity.”

Has Sheehan seen improvement following government actions? “Not really,” he states. “Just by opening ports on a 24/7 basis doesn’t directly translate to alleviating supply chain congestion. You have to have drivers to move the product and open warehouses with warehouse workers to move and store the product. Most warehouses aren’t open and staffed at 2 a.m. in the morning.”

He is a little more sanguine than his fellow SIORs on the prospects of the supply chain situation improving. “The current situation was definitely exacerbated by COVID-19 demand and changes in shopping habits, but I don’t expect this to be the norm going forward,” Sheehan says. “Workers will come back to work in factories and warehouses across the globe, and we’re already seeing the cost of shipping containers across the ocean come off their historic highs. Will we get back to where we were before the pandemic? Probably not, but it won’t be as bad as it is right now.”

MAKING ADJUSTMENTS

Based on their judgment that things may not change for a while, brokers have been adjusting their business approaches. For example, says Kasraei, “We are working on expanding our reach to markets three to four hours further out, as well as working with developers to intensify core industrial sites to meet the rising demand.”

Of course, it’s not all bad. Sheehan notes that controlling listings is definitely a lot easier at this time than working with tenants, “but the pendulum always swings; we just don’t know when.” The greatest opportunity right now, he says, is selling quality industrial real estate, “because there are so many new buyers out there competing with the traditional buyers.”

For the medium and long term, he continues, the focus will be on maintaining and growing existing landlord and tenant relationships, and using his company’s market knowledge to advise them concerning their particular situations. “This run can’t go on forever, but there sure don’t seem to be any near-term roadblocks!” he asserts.

“You need to start exploring a lot of different things you did not think about exploring in the past, like using different contractors, suppliers, and places to get stuff,” adds Silverstein. “From both a user’s point of view and a developer-owner’s, strategically, when you get into supply shock problems, it’s important to try and step back and start asking questions; how can we maybe get by without having to do what we were going to do for two years, until that problem gets resolved—especially when you cannot control its resolution?”

You can find a lot of interesting solutions, he continues, when you challenge things through basic “What-if” questions. “We can’t get a new building; can we change operations? Functionality? Think about all of the buildings being inspected using drones. The technology was there already, but it was not used. Now, with restricted employment, and ‘essential workers,’ it accelerated the adoption of that tech solution—and guess what? It’s actually better.”

Those are the situations, says Silverstein, that can create innovation. “Necessity is the mother of invention, and this is necessity ,” he says. “Find a solution you may never have thought you could get to, and those solutions may even be better.”

Source: “A Broken Chain“

Brokers and Developers Are Getting Creative to Ease Industrial Space Crunch

As nationwide vacancy rates for industrial properties keep registering record lows, and pricing for those assets skyrocket, brokers and developers are devising creative strategies to meet the insatiable appetite for space fueled by the ecommerce boom and supply chain issues.

A report released in October of 2021 by Prologis—aptly entitled, “Space Effectively Sold Out”—paints a fairly stark portrait of the limited supply in the market, and the numbers are eye-popping. Driven primarily by strong retail sales and supply chain challenges, U.S. net absorption for industrial reached a record high of 115 million square feet (MSF) in Q3 2021 and 280 MSF year-to-date—more than double the same period in 2020. That demand has pushed the vacancy rate to a new low of 3.9% nationally, with rents increasing by a record 7.1% from the second to the third quarter.

Construction starts rose to an all-time high of 120 MSF, with speculative construction accounting for 88% of all starts in Q3. But even that will not satisfy demand, as Prologis Research predicted net absorption of 375 MSF and deliveries of 285 MSF for the full year. On the investment sales front, transactions for industrial assets through the first 11 months of the year totaled $61.6 billion—an all-time high for sales volume—with sales prices averaging $111 per square foot in November. This is up a whopping 27.4% year-over-year across the markets, according to Commercial Edge.

With space at such a premium, and land costs exploding—particularly in densely populated metros—brokers and developers are coming up with outside-the-box solutions to accommodate space users.

RE-THINKING EXISTING SPACE

“Every market in the country is critically low on available industrial product right now, so sales and leasing prices have increased dramatically across the board in the last three to four years,” says Richard Sleasman, SIOR, president and managing director with CBRE-Albany in New York. “So what we’re doing is trying to find ways to shake the trees to create inventory that might not be on the market but maybe should be.”

One of the “tree-shaking” tactics Sleasman and his industrial team are deploying is identifying owner-occupied industrial buildings that may be underutilized by their occupants. The investigative work includes reviewing lists of manufacturers at the Chamber of Commerce, as well as old-fashioned tour rides to industrial parks or individual buildings in core areas, to evaluate inventory—particularly buildings with businesses that have been operated by families for generations. “The truth of the matter is that second or third generations in a family business may not have the same strategic thinking for the business as their parents or grandparents did,” explains Sleasman, who adds that companies that are in old-line industries experiencing a natural downturn because of competitive or technology trends (versus a tech business) are more likely candidates.

Sleasman and his team recently identified such a prospect, a family-owned building supply company in a 50,000 square foot warehouse/flex building with a product showroom in a core location. With most customers now able to view inventory online, the showroom and much of the building is currently underutilized. The brokers advised the owners that they could turn the building into an income-generating rental asset in a high-demand market or sell it outright at a greater value than they realized possible while operating their business in approximately one-third of the space in another building outside the urban core. “That came as quite a surprise to them,” says Sleasman, who says that many owner-occupiers are unaware of the current value of their properties. “A lot of these older, yet fully functional buildings were considered low value real estate, but now they represent opportunity,” he says. “Our job as brokers is to educate them on the market and make sure that they’re aware of the upside opportunity that’s in front of them that they may not be privy to.”

Sleasman emphasizes that the key part of such discussions must be to understand the people that you’re talking to, their business, and the industry in order to give them meaningful ideas as to how the re-utilization is going to positively benefit them. “Part of the discussion is the inherent value of the proposition, but the other part is getting them to understand how this is most likely a better way to operate their business as well,” says Sleasman.

GETTING AHEAD OF THE COMPETITION

As a result of the pandemic and supply chain issues, more users are requesting accelerated speed-to-occupancy timelines. “One of the things we’re noticing over the last three months is that 100% of these users need the space right away,” says Pat Feeney, SIOR, senior vice president and industrial and logistics specialist with CBRE Phoenix. Compounding the issue is the demand for industrial space within the Phoenix market, which averaged 9.5 MSF of absorption from 2014 to 2019, but has ballooned to an estimated 21 MSF in 2021.

In December, Feeney was representing four tenants, all of whom were looking to occupy space immediately. One user was seeking one million square feet of warehouse/distribution space. They were shown two options on a Friday and signed a licensing agreement for a 10-year lease at a 1.3 MSF facility the following Tuesday. “And they wanted the keys on Wednesday,” says the 35-year veteran. The sense of urgency is being driven in part by disruptions in the supply chain, as users fear the backlog of container ships at the nation’s largest ports will continue to dog the industry into 2022, preventing companies from getting their product on store shelves.

“What I’m hearing from users now is that they absolutely need the space within weeks or two months, and it’s causing havoc because all of the new product that’s being built in this market is in shell condition,” says Feeney. In response, he is encouraging landlords that are building new product to get ahead of the competition by constructing spec office, installing minimal lighting in the warehouse, and ordering dock equipment, which enables companies to begin operations more quickly. “That way we can get a user operational in 10 days to two weeks, versus a competitor’s building that may take four to six months to get ready for occupancy,” says Feeney. “We’re trying to find a solution for this short-term demand for space in a flexible manner. We think it gives the landlord a competitive advantage, and users are willing to pay more if your building can be delivered four months earlier than the competition.”

MODIFICATION OF EXISTING ASSETS

Another solution that brokers and developers are employing is the modification of existing industrial properties to create additional space. This tactic is particularly valuable in markets like Boston, where available space close to the city is in short supply and industrial developers have difficulty competing for land with multifamily and life science operators, as well as the burgeoning cannabis industry.

Arlon Brown, SIOR, senior vice president for SVN Parsons Commercial Group in Boston, says these modifications are being made in two principal ways: removing the second floors of two-story R&D buildings, or raising the roofs on single-story warehouse facilities to create high bay space. “Unlike an office building, a lot of these R&D buildings have heavy floor loads, typically six inches of concrete reinforced with rebar, so it’s well-suited for warehouse use,” says Brown. There have also been several projects in the Boston metro area where landlords have raised the roof on single-story warehouse to gain additional clear heights,

“It’s not done in Boston as much as other markets because the snow load makes the project more costly,” says Brown, who estimates that raising a roof may cost as much as $30 per square foot (psf) in Boston versus $4 to $8 psf in southern markets. “But if you’re close to Boston, and you can get rents in the low $20s, you’re going to recoup that cost pretty quickly.”

One developer that has effectively adopted both strategies is Seyon, a Boston-based value-add industrial owner that has grown a portfolio of over 50 assets totaling six million square feet in less than five years. In 2019, they acquired a single-story, 188,000 square foot manufacturing facility 30 miles outside of Boston, and re-positioned the spec building through extensive renovations, including doubling the clear height from 17 feet to 32 feet by raising the roof. The strategy paid off, as Seyon inked a long-term, full-building deal with a user before renovations were complete.

“The key is delivering the infrastructure —whether it’s clear heights, dock doors or power upgrades, and it’s a lot heavier lift to get those properties into a position where they’re ready for the tenants,” says Greg Hughes, construction manager at The Seyon Group. “I’ve been in industrial real estate for my entire career, and you have to get way more creative now in order to deliver industrial product.”

Source: “Race For Space“