[co-author: Darla Longo]

The industrial markets have recorded consistently high occupancy rates and above-average rental price growth in recent years. While the mood plummeted sharply in the June 2020 survey, it immediately recovered and has continued to improve. In the latest Allen Matkins / UCLA Anderson Forecast California Commercial Real Estate Survey, overall sentiment rose to its highest level since December 2015 for the next three years.

Industry leaders in the industrial market, Darla Longo of CBRE and Sandy Jacobson of Allen Matkins, discuss what lies ahead for this sector of California's commercial real estate market.

1. THE INDUSTRIAL MARKET CONTINUES TO BE ONE OF THE HOTTEST COMMERCIAL REAL ESTATE SECTORS AND SURVEY PARTICIPANTS MAY CONTINUE TO GROW AT LEAST THREE YEARS. WHAT IS ACCELERATING THIS MARKET AND WHAT FACTORS WILL FINALLY SLOW DOWN IT?

Far away: The capital markets will remain robust with the influx of new capital. We will continue to experience a compression of the cap rate due to the lack of supply. A slowdown in cap rate compression will be inflation and an increase in interest rates. Market demand has been accelerated by the sharp increase in ecommerce sales in 2020, which will remain stable in 2021. Other drivers of demand are users' plans to keep more inventory on land and an overall improvement in the US economy, which is keeping retail sales strong overall.

The comparative rents are even rising faster. While asking rents rose 7.1% year-on-year, if you look at the contracts signed from January 1 to May 31, 2021 compared to the same period last year, rents for the first year are actually up 9.7 % gone up. Markets along the coast, near growing population centers or with inland port hubs, saw the strongest rent increases. Inland Empire first year base rents rose 24.1% yoy through May. It also has one of the lowest industrial vacancy rates in the country at 1.5%. The need for facilities in these markets, coupled with record-low vacancies, may lead to bidding battles among tenants, which drive up rents.

E-commerce will continue to be a main driver of demand for the next three years. The increase in online demand has led users to search for seats, and we are still in the early stages of this need to expand.

Headwinds will be the lack of available space, the dwindling availability of labor and the possibility of delays in first generation available space due to increased material costs and delays. From the point of view of lack of space, we will continue to see an increase in renovations, including the conversion of production or obsolete industries, but also retail. While there are many barriers to retail conversion including zoning, location layout, and cost, retail conversion could be a winner in the right situation as they are usually located in well populated areas. I think we'll see that happen faster and faster in the years to come.

Jacobson: The point, click and ship model of buying soft goods gained momentum for years as the economy flourished in the pre-COVID-19 era. While there are a variety of reasons that have contributed to the growth of home shopping, the main one was because it made people's lives easier by saving them time. Enter COVID-19. Home shopping has become much more common due to closings orders and / or fears of the virus. In other words, COVID-19 has turned luxury shopping into emergency shopping in many different geographic areas and in different demographic groups. The switch to "necessity" led to increased demand for storage space, distribution centers and logistics service providers. Despite the previous growth of the industrial sector, there was not enough real estate available to meet the surge in demand resulting from the effects of the pandemic. It's simple economics. If demand is higher than supply, rents can and will rise. Until the home shopping model dies away or the vacancy rates rise (i.e. there is enough supply to meet demand), rents will continue to rise and property values ​​for industrial development will continue to rise.

2. WHAT DO DEVELOPERS AND LANDERS DO WHEN THE DEMAND FOR INDUSTRIAL SPACE IS HIGH IN ORDER TO STAY COMPETITIVE AND TO CONTINUE TO HEAR THE RENTAL RATES AND VACANCY RATES?

Far away: With record-low vacancies expected to decline even further, it is definitely a market for landlords. Landlords don't have to do much to stay competitive. In many markets there are several tenants who want to rent the same space, which drives up rents.

Jacobson: It is not difficult for property developers and landlords to find tenants who will move into their buildings and pay higher rents because the demand is so great. The greater competition exists between property developers and landlords in order to lure tenants with good credit ratings to their locations and away from the locations of a competitor. New builders and landlords will always have an advantage because the user gets a new building built using the latest technology, a building with higher ceilings than older buildings and more gates than some of the older industrial products. The downside, however, is that these buildings were more expensive to build, so rents and taxes are higher. For both newly built buildings and existing products, landlords and property developers use a combination of free rental incentives, tenant expansion allowances, operating cost caps and extension options to motivate a tenant to choose their building. Landlords and property developers can amortize these "incentive costs" by slightly extending the lease terms.

3. WHAT NEW TECHNOLOGIES OR SAFETY DIRECTIVES ARE IMPLEMENTED IN NEW OR NEWLY DEVELOPED INDUSTRIAL SPACES, EITHER COVID-RELATED OR DUE TO THE INCREASED DEMAND?

Far away: The health of COVID has very little impact on spatial planning. Companies keep a 6 'guideline in mind, but it does not significantly affect the overall design of the facility. However, the growth of e-commerce has led to changes in facility setup requirements such as:

  • Parking and staging added
  • 38-40 'headroom, flat roof
  • loads hanging from the ceiling
  • maximum dock loads dock
  • increased electricity service and distribution
  • Air conditioning / ventilation

Workers will continue to be important, and markets of increasing employability and affordability will win in location selection. A tight job market and increased demand for fast shipping will lead to more automation in the years to come. We are already seeing the implementation of automation in warehouses, not only at retailers, but also at 3Pls.

Jacobson: As a result of the pandemic, there are some changes in industrial development and redevelopment. This includes changes to ventilation systems within buildings and floor plan layouts to encourage better spacing. However, the larger (and more expensive) technological advances are increasingly being demanded by the authorities approving projects. For many developments and renovations, the government authorities are now imposing requirements on green electricity. More typical new requirements include solar energy systems, electric charging stations for cars and trucks, and drought tolerant landscaping. Some jurisdictions even go so far as to allow projects to have fleets of electric trucks that can be used in day-to-day operations. There are also more typical green energy requirements implemented or imposed by developers to reduce the number of trips, traffic jams and other noise pollution. All of these technologies ultimately help the environment and help create efficiencies, but the increased development costs will certainly continue to be passed on to users.

source https://seapointrealtors.com/2021/07/22/pandemic-fuels-continued-growth-of-industrial-market-allen-matkins/

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