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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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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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