By Lester Osborn, CCIM, SIOR, Principal of Piedmont Properties | CORFAC International, Charles Sevier, SIOR, CCIM, Principal of Crump Commercial | CORFAC International, Milton Thomas, SIOR, CCIM, Principal of Anchor Commercial | CORFAC International and Matt Sherrill, an agent of Chas. Hawkins Co. | CORFAC International contributed to this column.
Since the start of the recession, sales and leasing of industrial real estate — including transportation-related properties — have slowed considerably. Most transactions have involved renewing or renegotiating leases at lower rates. Of the property sales that have occurred, most have been at bargain prices.
At this time, there is almost no new industrial product coming available in all major and secondary U.S. metro, submarkets. For now and the foreseeable future, it is and will be much cheaper to buy and retrofit existing distribution, warehouse and terminal facilities than to build them from the ground up.
Industrial vacancy rates have risen for the past couple of years as the freight industry has continued to consolidate. Other factors include the dramatic increase in fuel prices in 2007 and 2008 and, more recently, recession. However, the industrial sector is faring much better than office and retail commercial space in most submarkets of the country. The vacancy factor is around 15% and considered relatively healthy, i.e., balanced for owners and prospective occupants alike.
Yet demand is slacking, and there is excess terminal capacity. In many cases, particularly with older buildings and facilities, terminal properties may be worth only the value of the land.
We are beginning to see some indicators that the dynamics are beginning to change and the most obvious factor is the size of traditional less-than-truckload facilities. As consolidation continues and two companies combine to form one, the door requirements also increase. We now are seeing markets where the door requirement for the average carrier has increased to the point where the smaller facilities are no longer desirable.
This puts pressure on sellers and property marketers to find alternate users for these properties outside the LTL world and often results in lower rents and overall reduced property values.
For example, a pallet company based in Texas but with operations in Memphis recently leased an 85-door terminal for approximately 25% less in monthly rent than when the facility was operated by a freight company. What’s more, the pallet company had another motive in mind that speaks to an emerging trend in transportation real estate — the flight to quality. The company moved from a venue in Memphis to a superior location and got a more modern facility — a 1980s-built terminal versus a 1960s-vintage facility, with nicer offices and the added benefit of a larger surface area in the parking lot for stacking pallets — all for less rent than they had been paying.
In every real estate down cycle there is a flight to quality, and we expect this will be the case for the remainder of this year and the next because of opportunities for thriving enterprises to enhance their image and secure better locations at lease or purchase prices not seen since the last economic downturn.
There are many variations of “extend and blend” leasing taking place in the marketplace, yet the basic point is that companies can lock in really good long-term deals for the foreseeable future.
Alternative users that have found LTL facilities attractive include container companies, trailer leasing companies, contractors, heavy equipment sales or leasing companies —anyone, really, who needs outside storage, exposure and good access to the interstate highway system.
The container storage business has increased more than anything else. With the reduction of freight orders and increased inventories at points-of-purchase, containers are sitting idle, waiting to be moved and requiring storage space in the interim. If there is a bright spot on the horizon it is the increased demand by Chinese companies absolutely in the market for more containers. The delivery and usage may not come in time to help the shipping, distribution and storage business by the 2009 holiday season, but it bodes well for 2010.
Some LTL facilities are being converted for longhaul truckers who need more parking and may be adding market share, but there is not yet enough of this activity to call it a trend. We’re aware of at least one longhaul company that bought an LTL facility, kept the offices and two docks and used a cement saw to cut away the rest of the building. Once that was accomplished, the unwanted section of the building was demolished and the ground paved for parking big rigs.
Another observable trend is the relative strength of rail-served industrial facilities and super-sized logistics centers. Industrial properties with rail service are experiencing greater occupancy than nonrail distribution facilities and should be among the first property types to enjoy even stronger absorption when the economy recovers.