Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/164181
CCIM.com Today's Industrial Market Te Great Recession jolted real estate markets, which are still feeling the afershocks. While the industrial real estate market is seeing strong signs of recovery, to understand today's investing environment, we must look at the changes since 2008. Post-Crash Update Te U.S. capital markets peaked in 2007, only to see the failures of major U.S. fnancial institutions over the next year. As is ofen the case, the real estate markets lagged other capital markets in their response to changes in the economic situation. Despite declining leasing demand for industrial space and high levels of new construction starts, both equity and debt were readily available for industrial real estate investment. Low capitalization rates and high deal volume carried through for most of 2008. Starting in fourth quarter 2008, capital evaporated and fundamentals further deteriorated, leading to a dramatic downward spiral. Absorption turned negative across most markets and speculative projects started in the prior year were delivered without tenants — driving available inventory to record high levels in 2009 and 2010. Asking rates crumpled as owners desperately tried to preserve occupancy. Tenants went into a holding pattern as questions swirled about the future of their As the recession ended, activity started picking up across a number of markets, led by the western U.S. markets. It should come as no surprise that the Inland Empire of Southern California led the country with high levels of absorption and the return of spec development focused in the super-bulk segment. Since 2010, more than 43 million sf has been absorbed, driving down IE's vacancy; developers have responded with 9.5 million sf under construction as of the end of frst quarter 2013, according to CoStar. As other markets began to rebound, it became increasingly clear that the industrial real estate marketplace had changed in many ways. First, due to technology innovations, world trade patterns, and supply chain practices, sustained demand for very large distribution centers in the top logistics markets has been clearly established. Second, proximity to superior logistics infrastructure is driving location selection for industrial tenants, especially for larger operations and e-commerce fulfllment centers. Proximity to ports, freight airports, and intermodal rail yards is clearly driving demand in the top logistics markets. Tird, underwriting industrial leases has become much more complicated than in the past due to a vast range of debt and equity structures available as tenants and investors wrestle with predicting the future of infation in the current very low yield environment. Finally, a build-to-suit development for all sizes of industrial properties is even more competitive, much more than during the recession. Tis has created a market that favors the tenant. Tough still proftable, build-to-suit developments ofen lead to bidding wars for a tenant's business, but investors that control the best land sites in the top markets have a signifcant competitive advantage. Tenant Preferences Today's tenants are looking for class A space with modern functionality. Tese requirements range from higher clear heights, ample trailer and employee parking, energy efciency, and proximity to logistics September | October | 2013 Petr Malyshev/Veer; Corbis Photography/Veer; Fancy Photography/Veer T operations. Many companies and industries downsized and gave space back. Active expansions were put on hold or canceled. Te only silver lining for the industrial market — especially developers — was the accelerating trend to consolidate supply chain operations into very large distribution space. Tis gave rise to the super-bulk distribution centers: modern logistics facilities from 600,000 square feet to more than 1 million sf. As demand for small buildings declined dramatically, demand for very large spaces held fairly strong as tenants insisted on increased supply chain efciency. Te big buildings flled up, ofen at market rates higher than smaller spaces. Large build-to-suits were able to capture even higher rents per square foot in many markets. With the relatively short development cycle, some developers were able to react quickly to a volatile market and changing customer demands. For real estate companies with class A space and readily available land and capital, this created a market advantage. 31