As commercial real estate’s wild ride continues well into the warmer summer months, industrial landlords and investors have found themselves in one of the best imaginable situations compared to other asset classes. With high demand for and investor interest in industrial space, it truly is a landlord’s market in 2021.
However, this doesn’t mean that industrial property management is a set it and forget it proposition. If anything, the white hot demand for industrial means that landlords have to be more involved than ever in their lease deals.
“I think in today’s environment, [industrial property management] has really shifted to being much more hands-on,” says Victoria Knudson, Partner & National Leader of Property Management for Stream Realty. “Tenants want to understand their lease, what is their responsibility versus your responsibility — there is a lot of a lot more communication as it relates to how things run and managing expenses.”
And not only has tenant management become more hands on, the number of phone calls with other layers and players in the industrial segment have also increased dramatically, Knudson adds
From inquiries about available space, discussions about the local workforce, and talks about budgets, industrial landlords have also had to become comfortable with wearing multiple hats and expand their breadth of knowledge when it comes to the many different aspects involved in a site selection process or deal negotiations.
But the biggest issues for industrial tenants, particularly in logistics, warehousing and light manufacturing, remain costs associated with fuel and access to labor, Knudson says. Real estate is more or less a fixed expense, but it’s finding that balance of tapping into the right workforce and also being located where it makes the most sense for fuel and transportation costs.
With there being so much demand for industrial space, industrial landlords haven’t had to have the painful conversations about concessions and deferral arrangements that office and retail property owners and managers have been faced with throughout the pandemic. Instead, it’s almost been the opposite, Knudson suggests.
“Our [industrial] occupancies across the country are in the mid-90s percentage wise, and I run our national platform for industrial property management,” Knudson says. “Industrial is the hottest commodity and it can’t be built fast enough to be filled … so there’s no concessions and no rent credits. Our accounts receivable does not exist; it’s zero.”
Leasing has also been very strong for Duke Realty, which is currently building a handful of new industrial developments across the Chicago area at the moment. Susan Bergdoll, Senior Vice President Leasing and Development for Duke Realty, is leading the charge in the Chicago area and greater midwest for the REIT.
“Our [Chicago area] portfolio is 17.2 million square feet and I have two vacant spaces right now,” Bergdoll says of the strong demand and limited availability for Class A industrial space in the Chicago region. And tenants paying top dollar will expect all the bells and whistles, such as efficient overhead LED lighting, modern HVAC systems, and plenty of trailer parking.
But there’s still much more on the way. Currently, Duke is working on four new industrial developments in the Chicago area, including two spec projects: a 300,000-square-foot development in Bellwood and a 370,000-square-foot facility in Woodridge. Both of these new facilities are anticipated to be completed by the new year.
And similar to other major property owners and managers, Bergdoll says that her team has not had to offer free rent or other concessions to tenants. “The industrial market is so strong right now that we aren’t faced with some of those painful conversations that office and retail landlords are faced with,” Bergdoll adds.
However, if it means keeping a tenant and a lease renewal, all options are on the table, Bergdoll suggests. In this intensely hot and competitive market, it’s truly survival of the fittest.
“You’ve got to know who you’re competing against,” Bergdoll says. “You could be competing against a building that’s been sitting vacant for 12 months and that guy might be a lot more willing to offer up some concessions.”
One of the biggest unknowns facing industrial real estate right now is just how long the hot market will go on for. Both Bergdoll and Knudson aren’t too worried, at least for the meantime. Nevertheless, the near future looks just as bright for industrial landlords and property managers.
“We’ve been on an upward trend with industrial for a long time coming and it just continues to grow and grow,” says Knudson. “I don’t have a crystal ball so I don’t know that it can sustain forever, so at some point things will give, but for the foreseeable future — I’d say the next 24 to 36 months — I don’t see a decline; the demand is just too great.”