Industrial Property Lease Terms Get Shorter And Shorter

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Landlords of warehouse and distribution properties may look to shorter leases to capitalize on burgeoning e-commerce-driven demand, with the pace at which average lease terms are shortening picking up major speed.

A new analysis from Moody’s Analytics notes that pricing and fundamentals of the sector never decreased as a result of the pandemic, and instead posted record high occupancy and rents as retailers clamored to deliver goods faster and more efficiently. E-commerce as a share of total retail sales now stands at a record high of 15.7%.

And accordingly, “landlords may seek shorter lease term lengths to capitalize on this demand, likely looking for flexibility to sign new tenants or renew existing leases at inflating rates while the sector experiences strong rent growth,” notes Ricardo Rosas and Ermengarde Jabir in the report. “This avoids locking in a tenant at a ‘lower’ rate without a boost to their net operating income for an extended period of time.”

An analysis of 101 metros by Moody’s Analytics shows that from 2017 to 2019, the average lease term for warehouse and distribution space changed around the 36 month mark. Since that time, the average lease term fell 20% to 29 months, and the last two quarters of 2021 saw lease terms declining by an average of 4% per quarter. The proportion of newly inked leases from 25 to 60 months in duration declined by 24% over the last three quarters of 2021, while the share of properties with lease terms of two years or less saw a 22% increase. And “leases whose terms fell into the 13- to 24-month range gained the greatest share of the market in 2021, increasing by 14% over the last three quarters,” according to the report.

“On the supply side, these shorter lease terms appear to allow for the renewal of existing leases or to sign new tenants for existing space at rising rental rates,” Rosas and Jabir note.

The biggest decline in lease term lengths was in the Midwest ,which also had the lowest rent levels and the second lowest occupancy rate amongst the areas Moody’s tracked.

“These landlords most likely desire to boost rents in a shorter period of time since they see sustained heightened industrial demand,” Rosas and Jabir note.  “Additionally, tenants may also desire shorter lease terms if they think the market will eventually cool off and do not want to be locked into a particular rental rate while they contemplate business uncertainty and perhaps view this additional warehouse space as a bridge to mitigate supply chain stress in the interim. On the demand side for distribution properties, there is a ‘take what is available and then see’ approach in the short term.”

 

Source: GlobeSt.

 

 

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The Next Institutional Investment Frontier Is Industrial Outdoor Storage

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What they used to call “back-office” properties, industrial outdoor storage (IOS) space is now a $200-billion asset class that’s firmly on the radar of institutional investors.

The demand for the diminishing number of IOS lots, clustered around US cities, that are zoned to permit outdoor storage is skyrocketing.

IOS lots are being used as storage facilities supporting e-commerce, infrastructure, construction and logistics businesses, storing everything from equipment and vehicles to stacks of containers. They’re typically zoned to restrict any building from covering more than 25 percent of the property. Rental prices are set by the acre instead of SF.

Industrial market experts believe that the IOS market, currently a highly fragmented segment largely devoid of institutional ownership, is on the cusp of becoming a major asset class for institutional investors, with a growth trajectory that could match the rise of BFR in housing.

“They’re not creating more land for outside storage. In most cities, nobody wants to see more outside storage,” Rob Kossar, vice chairman at JLL who oversees the company’s industrial division in the Northeast, told GlobeSt. “It’s zoned out everywhere, so wherever it exists, it’s super-valuable. That’s why institutional investors have suddenly woken upto IOS.”

During the unprecedented shortage of vacant industrial warehouse space in US markets, investors who in the past five years have focused on newer, more “pristine” industrial spaces are now willing to consider these older urban IOS lots, he added.

A heavyweight fight for hegemony in the IOS market is shaping up between Alterra and JP Morgan Chase.  Alterra, which owns 100 IOS properties in 27 states, is launching a $1.5B expansion to defend its leadership in the sector. Alterra is targeting IOS space from 5,000 to 100,000 SF on 2 to 30 acres, with deals between $5M and $20M.

In a recent interview, Alterra’s CEO said the investment is a “multi-decade bet” on the growth trajectory for the value of IOS properties.

Zenith IOS, launched last year as a platform aiming for low-coverage industrial sites for tenants seeking outdoor sites, recently formed a $700-million venture with JP Morgan Chase that will acquire urban infill industrial locations in major cities.

Because IOS are clustered around major cities, the properties are suited for institutional aggregation. The infill nature of IOS properties, along with typical industrial zoning restrictions, limits the supply of IOS space and assures constant demand from a loyal tenant base, resulting in bigger residual values than other industrial properties.

With options for new warehouses with adequate vehicle parking increasingly limited in urban areas, the acreage available at IOS sites increases in value. Industry analysts see the IOS sector consolidating over the next five years, similar to what has happened in the self-storage sector. In terms of value, IOS may soon overtake cold storage as a growth sector, drawing more attention from institutional investors.

 

Source: GlobeSt.

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Sperry CGA | RJ Realty’s Ron Osborne Negotiates Sale Of Oakland Park Retail Plaza

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Ron Osborne, Managing Director/Broker of Sperry CGA | RJ Realty, negotiated the sale of a retail plaza located at 1504-1538 E Commercial Blvd in Oakland Park.

The deal closed March 14.

Boulevard Center is a retail strip center consisting of 5 buildings developed in the 1960s and early 1970s totaling 21,510 square feet situated on a 80,111-square-foot lot with 435 feet of frontage on East Commercial Blvd.

The property was listed at $4,950,000 and within days, multiple full price offers were received – some over list price.  The property closed within 0.5% of list price and a sub 5% capitalization rate.

“Even after the property went non-contingent and buyers were told that the property was sold, we had numerous buyers wanting to put up a backup contract,” explained Osborne.  “We are still working with those buyers looking for retail properties with long term upside.”

Bahr Investments, represented by Jonathan De LaRosa with Marcus and Millichap, purchased the asset.

Osborne added, “This trade illustrates the continued, frenzied demand for small retail properties throughout Broward County Florida.  The lack of well-located retail properties for sale throughout South Florida has driven the price points higher and the return investor will to accept lower.”

 

 

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New SEC Environmental Disclosure Rules Will Hit CRE Surprisingly Hard

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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:  GlobeSt.

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How Retail And Industrial May Adapt In The Coming Years

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Industrial is thriving and has risen to become an especially important sector in commercial real estate. On the other hand, retail had already experienced a few challenging years before the pandemic hit, particularly Class A and B malls with large retail anchors. Partner Insights spoke to Judy Guarino, managing director for commercial mortgage lending at JPMorgan Chase, to learn more about where both sectors stand today.

Commercial Observer: Since the beginning of the pandemic, industrial has become the darling of commercial real estate. What is its current state?

Judy Guarino: Thanks to e-commerce, industrial continues to boom, as it did before the pandemic. Now it’s even more in demand since consumers fully embraced online ordering to get items delivered directly to their doorstep. The businesses without an e-commerce operation pre-pandemic certainly saw the importance of it over the last couple of years. Industrial will remain a hot asset class, especially in the Northeast among densely populated markets.

How significant is the shortage of U.S. warehouse space right now?

Space has always been an issue in New York, for every property type. In the boroughs of New York City, old stock is being renovated and developers are learning how to best utilize the space with some unique projects. There’s a bit more land for new development in northern New Jersey. It’s probably the one market where you’ll continue to see growth as it pushes its way down to the southern part of the state. There’s definitely a need for more space, and everybody is working together to figure out how to make it work.

How is everything we’re discussing affecting JPMorgan Chase’s lending in that sector?

We’re very busy. There’s a lot of activity in all the commercial mortgage lending assets, be it retail, industrial or mixed-use. Rates are low and refinancing activity has been high. We haven’t left our clients’ side. We have and will continue to lend. In fact, I have been expanding my team to help support our clients as we experience expected growth.

Brick-and-mortar retail has been in a tenuous position, with the continued rise of e-commerce and lockdowns resulting from the pandemic. What is the current state of brick-and-mortar retail?

We focus mostly on neighborhood retail. There’s always going to be a need for retail, though the type will likely change with the environment. For example, we don’t see as many shoe and clothing stores as we did in the past. But we continue to see strength in service businesses: hair and nail salons, various food takeout, etc. Twenty years ago we saw more video rental stores, local pharmacies, photo printing shops and delis. Now, we see so many more variations of food establishments and businesses that focus on health and wellness and personal improvement, because that’s what people are looking for. A lot of medical has come to retail. It used to be that only retailers needed street visibility. Now, doctors, dentists and other health professionals are forming medical groups where visibility is important. We see a lot less vacancy in neighborhood retail now compared to the beginning of the pandemic. Where we continue to see stress on retail is in areas that are dominated by office, like Midtown Manhattan, or tourist spots like Times Square. When we all get back to the office and tourism continues to improve, those retailers will come back, and new business will fill vacancies.

How do you think industrial will fare five years down the line?

I think it will still be very strong. It might start to look a little different. We’re going to see a lot of new industrial facilities being built, some of them with showrooms. Some will be multi-tenant and multi-story, allowing truck delivery on multiple levels. We’re going to see industrial properties with mother’s rooms, employee gyms, complimentary snacks and other amenities that were typically available only in office space. This notion of keeping the front office and manufacturing together in one facility is on the rise.

Is there anything else you wanted to touch on as far as interest rates?

One important thing to note: There was a time when interest rates were at 9 or 10 percent. Everyone became so used to seeing low 3s or high 2s, but current rates are not terrible. It marks a slow rise. Some people forget history, when rates were 10 to 16 percent in the late 1970s through early 1980s, or the 1990s and early 2000s when rates were 9 to 10 percent. In the current low-rate environment, investors continue to take advantage.

 

Source:  Commercial Observer

 

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Could Higher Gas Prices Have Ripple Effects For Retailers, E-Commerce Leasing In Industrial Market?

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Retailers and wholesalers accounted for the most industrial deals at 200,000 square feet or larger last year, or 35.8% of all leasing activity, a considerable increase from 24.7% in 2020, according to CBRE Group Inc. E-commerce fell from the No. 1 spot in 2020 to third last year, accounting for 10.7% of all deals, while 3PLs grew from 25.8% to 32.2%, ranking No. 2 among large industrial leases in both 2020 and 2021.

Propelled by a surge in online ordering, and changes to consumer preferences in part because of the pandemic, retailers and 3PLs have ramped up their distribution networks considerably in recent years. That demand is expected to be sustained this year, and could become even more frenzied with the recent surge in gas prices.

James Breeze, senior director and global head of industrial and logistics research at CBRE, said transportation accounts for at least 50% of a typical industrial occupier’s costs, even before the recent hike in inflation and oil prices. But, largely because of sanctions imposed on Russia from the war in Ukraine, oil prices have risen dramatically, although Brent crude futures — a key benchmark for oil prices — began to decline this week. National gas prices were down 0.2% between Monday and Tuesday, according to AAA.

Any run-up in transportation costs will likely outpace warehouse rent growth, even while that’s growing at a rapid clip, which could result in even more demand for warehouse space, Breeze said.

Carolyn Salzer, senior research manager of industrial logistics at Cushman & Wakefield PLC, said higher gas prices could have a ripple effect on the industrial market, depending on the user and their supply-chain model. Both Salzer and Breeze said real estate costs for warehouse users have typically been about 5% of a company’s costs but, more recently, that’s gotten closer to 10%, Salzer said.

 

Source:  SFBJ

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What’s The Opportunity For Office To Industrial Conversions?

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The good news in office space: occupancy has been on the rise. But any CRE professional watching the markets knows about the shoe that next drops—it’s going to take a good amount of time—11 quarters, according to Costar and the National Association of Realtors—for things to get back to normal and all the space to be absorbed. If it ever all is.

That leaves property owners and operators wondering what will eventually happen and how many workers will be dragged into traditional office space.

One hope is that space can be converted to other uses. An attractive possibility would be industrial, given how hot the sector has been. But the path from the particularities of office construction to warehouses and distribution centers is not so easy, according to a new analysis from Prologis.

The struggles for obvious reasons have been clear, with health concerns about potential new Covid-19 strains and the costs of retrofitting older buildings, both in space designs and HVAC upgrades.

There is an overall limit of how much office space could be directly converted. Most office space has some serious limitations. Modern logistics require high clearance heights, many truck bays, power upgrades, nearby facilities to provide parking for trucks, and additional power requirements.

“Offices have limited reuse potential as logistics facilities and must be demolished, adding to an already complex process, lengthening development timelines and boosting the rents needed to financially justify conversion,” Prologis notes. 

Looking at the top 25 markets it tracks and the Class-A office to logistics spread—meaning expect Class-B and lower offices to be the most likely candidates to demolish and rebuild—Prologis estimates that between 40 and 80 million square feet of office will undergo conversion.

Some of the extending complications are the need for large enough underlying land plots, costs of removing tenants from offices, and the need to ultimately gain premium rent because of the total conversion expense.

“Despite potential opportunities, the office-to-logistics conversion trend is likely to be minimal,” the report says. “Successful redevelopments will be concentrated in areas with high land costs and limited competition from nearby logistics properties. New supply from this source will take time to come online because resolving existing agreements, demolition, rezoning, entitlement, permitting and approvals take much longer than a typical greenfield logistics development.”

 

Source:  GlobeSt.

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More Than Half Of Workers Back To The Office In Downtown Fort Lauderdale: Report

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Downtown Fort Lauderdale’s return to the office is outpacing that of major markets such as New York, San Francisco and Austin, as well as the national average, a new report shows.

From 50 percent to 55 percent of workers were back to working in the office in February in downtown Fort Lauderdale, a 10 percentage point increase compared with summer 2021, according to the report from the Fort Lauderdale Downtown Development Authority.

“I think what we are seeing is employees are eager to break the routine from the past two years from the pandemic,” said Matthew Schnur, research and innovation manager at the DDA.

The strong return to the office is partly rooted in the population influx to downtown, a “critical mass” that has fueled more retail and restaurant openings, he said. Dining and shopping options are vital to creating a vibrant downtown to draw workers, and office amenities such as gyms and rooftop bars are pivotal in prompting a return of employees, Schnur said.

The DDA study is based on estimates provided by office property managers and traffic in the garages, and compares to findings by nationwide Class A office building security provider Kastle Systems, whose “Back to Work Barometer” tracks occupancy in 10 U.S. metro areas.

Kastle Systems, which uses card swipe data for its estimates, does not track the Miami-Fort Lauderdale metro area. But it shows that almost 31 percent of New York workers were back to the office as of February, almost 25 percent in San Francisco, 50 percent in Houston and almost 52 percent in Austin. The national average of return to the office was 36.4 percent, according to Kastle Systems.

The DDA study focused exclusively on Class A office buildings from East Broward Boulevard south to the New River, and from South Federal Highway east roughly to Andrews Avenue, Schnur said.

Included in this area is the 25-story office tower that is part of The Main Las Olas, completed in 2020. It is part of the larger, 1.4 million-square-foot mixed-use development that spans a full city block and includes the Novo Las Olas apartment tower and retail. A partnership of Stiles and Shorenstein Properties developed the complex.

The Main office tower is 93 percent leased, with tenants including Synovus bank, which took 19,985 square feet, and audit and tax consulting firm RSM, which took 16,570 square feet, according to a news release.

Danet Linares of Blanca Commercial Real Estate is the leasing agent for the office building’s landlord.

The amenities at the tower, at 201 East Las Olas Boulevard, such as the gym, conference center and tenant lounge are playing a role in tenant demand, said Christina Stine Jolley, also of Blanca Commercial.

The tech company influx to South Florida largely has concentrated on Miami’s Wynwood, although the demand from these companies could start creeping north to downtown Fort Lauderdale.

“Historically the downtown Fort Lauderdale office market has been driven by financial and legal service firms,” Stine Jolley said. “We have seen an influx of new-to-market firms in the last year or so, and that has included some tech [firms] and it also has included some real estate, legal, financial services, insurance” companies.”

The direct vacancy rate across downtown Fort Lauderdale decreased to 18.7 percent in the fourth quarter of 2021, down by roughly 5 percent from the third quarter, said Stine Jolley, citing Blanca Commercial data.

“I think it speaks to the continued urbanization of downtown Fort Lauderdale. Just since the pandemic alone, we have seen over 275-plus residential move-ins every month,” she said. “People, they want to live and work here.… It’s something we are projecting is only going to increase and have greater velocity, frankly, over the next few years. “

 

Source:  The Real Deal

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$149M Mixed-Use Project Coming To Oakland Park

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Oakland Park selected a partnership of Falcone Group and Kaufman Lynn Construction to redevelop 4 city-owned acres, plus 2 adjacent privately-owned acres, into a massive mixed-use project featuring a woonerf.

The Oakland Park City Commission on Wednesday approved authorizing city staff to begin negotiations on a development agreement with Falcone Group and Kaufman Lynn.

The redevelopment site includes the current city hall building at 3650 Northeast 12th Avenue in downtown Oakland Park. The city-owned property is near Funky Buddha Brewery and a proposed commuter train station that will be serviced by Brightline. The Florida Department of Transportation has recommended the train station be placed in Oakland Park.

A Falcone Group spokesperson stated that the proposed project has an estimated construction cost of $149 million.

A key element of the Falcone-Kaufman Lynn proposal is the placement of a woonerf between two mixed-use buildings. A woonerf is a street in which automobiles and pedestrians share the road and is designed with devices to slow down traffic. Woonerfs were first developed in The Netherlands and one is planned for Wynwood as part of a proposed street and sidewalk improvement project.

The woonerf in downtown Oakland Park proposed by Falcone Group and Kaufman Lynn would feature a botanical garden, a sculpture garden and long narrow green spaces where small retail kiosks and seats could be placed, according to the development team’s proposal.

A building on the redevelopment site’s northern side would entail a mix of office and retail, apartments, live/work units and a parking garage. The roof would be configured as an event space, the proposal states.

On the south side, the partnership is proposing a three-story townhome building and another mixed-use building with retail, apartments and parking.

The winning bidders also plan to relocate a park on the 2 acres of private land that would have to be acquired by Falcone Group and Kaufman Lynn, the proposal states.

 

Source:  The Real Deal

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Self-Driving Trucking, E-Commerce Industries Compete For Industrial Space

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It’s never easy finding parking, and the fledgling autonomous truck industry is feeling it on a major scale.

The advent of self-driving trucks is motivating a land grab for transportation hubs near major cities, particularly across the Sunbelt states, but finding suitable land has been a challenge.

Two companies have teamed up to tackle the problem.

San Francisco-based Embark Trucks, a self-driving truck startup that went public last year, has partnered with Philadelphia real estate firm Alterra Property Group to form a network of outdoor storage sites that will serve as transfer points.

In September 2021, Embark said it would seek up to 100 transfer sites to be operated by transportation company Ryder. With the partnership in place, the transfer sites will be leased from Alterra.

“Industrial outdoor storage as an asset class has yet to be institutionalized, making it difficult for tenants with specific and nationwide real estate needs, like Embark, to systematically access a network of suitable sites,” Leo Addimando, managing partner of Alterra Property Group, said in a statement.

Founded in 2016, Embark has worked to develop software to make trucking safer and more efficient while tapping into a nearly $700 billion annual market that dominates 80 percent of the nation’s freight.

Embark launched its first trucking route between Los Angeles and Phoenix in 2019, and five companies signed on to use it, though at that time the industry was using Level autonomous vehicles. As the Embark network has evolved to include additional routes, it also needs nationwide coverage to support the nation’s largest fleets as they purchase, own, and operate trucks equipped with Embark’s technology, dispatching them between these transfer points.

But after two years of pandemic-fueled demand for industrial and logistics space, the competition for these spaces — particularly in the environs of highly trafficked cities — is intense.

Strict zoning ordinances that prohibit truck storage add an extra challenge specific to the trucking industry.

But Alterra’s experience could give Embark a leg up in the race for industrial space. “We have the ability to provide Embark a strategic advantage when it comes to identifying, securing, and developing a nationwide network of autonomous-ready sites,” Addimando said in the statement.

Alterra will have competition. In December 2021, logistics firm Zenith IOS launched a partnership with JPMorgan Global Alternatives to buy about $700 million worth of industrial outdoor storage, of which $150 million has been spent so far, according to The Wall Street Journal. Atlanta-based Stonemont Financial Group, likewise, partnered with Cerberus Capital Management to invest in the sector last year.

But while investors are working against the clock to secure land in strategic locations not already zoned against truck storage, they are also having to compete against e-commerce interests that hope to use the land to warehouse products themselves, The Wall Street Journal reported.

Embark, which went public in a $5 billion deal in November, according to The Wall Street Journal, is aiming to have its first fleet of trucks navigating the highways of states such as California and Texas as early as 2024. The autonomous trucks would only take the highways, however, as the transfer points will be needed for human truck drivers to take over before entering cities.

 

Source:  Commercial Observer

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