The real estate market thanks to the failure of Fannie Mae, Freddie Mac and other big lending institutions is in total upheaval.
This turbulence, which has influenced the whole international economy, can have a tremendous impact on your business.
“At the end of day, make sure that the consumer the person whose business relies on the product gets it in a timely fashion and that the costs of delivery are as low as possible,” says Blake Anderson, SIOR, Senior Vice President in Grubb & Ellis Company’s Dallas office.
Smart Business talked to Anderson about making industrial real estate decisions in this economy.
How are companies that are contemplating a new facility coping with the current economic situation?
On the leasing side, there’s a tremendous slowdown in decision-making. Executives are saying that maybe they don’t need that brand-new distribution facility, if they can continue operating as they are today, thereby incurring less risk and keeping costs down. A lot of companies are just renewing leases for six months or a year instead of five to 10 years.
On the user acquisition side, instead of spending substantial dollars on moving and consolidation costs, CEOs and CFOs who are compensated on bottom-line dollars are keeping their purse strings tight.
What benefits are obtained through ‘value engineering’?
‘Value engineering’ your facility is taking a conservative approach in making your facility functionally sound but not spending extravagantly. One or two years ago, tenant representatives were asking landlords for high-end everything, from lights to flooring to dock equipment. Today, with construction costs being so high, some landlords are willing to amortize those costs back into the lease but only if the tenant has strong or substantial credit. My clients are often setting aside tenant improvement dollars for future use to keep overall occupancy costs down.
Value engineering has to be the theme now that companies are learning to operate on a tighter budget. If the C-level people making the decisions are wasting money, they are not doing their job.
How important today is a company’s logistics team in choosing the right location?
Logistics is how the product gets to the consumer efficiently, quickly and with the lowest costs possible. Fifty percent of the cost of logistics is transportation. Labor is about 17 percent. Rent is just 4 to 5 percent.
With the rising cost of transportation, it’s even more important to bring a logistics team into the decision-making process from day one, because a difference of 50 miles can change the economics tremendously.
A logistics team and its expert advisers must look at potential locations based on labor costs, labor availability, incentives, ease of doing business, access to major thoroughfares, and access to intermodal and/or freight rail. Those are key elements in making a sound decision.
Can good values still be found in the industrial real estate market?
There is very little on the market as far as investment real estate. However, off-market deals from owners who find themselves in must-sell situations are increasing in numbers each day.
Conversely, there are a lot of great lease deals. If tenants are looking to renew, they’ll find great concessions. Because landlords don’t want vacancies, they are being very accommodating, especially with shorter terms, while still asking for market rental rates. This is not the time to have empty buildings.
What kind of terms are banks offering nowadays if any at all?
‘If any at all’ is the key. Most big lenders have completely shut down most of their lending even to AAA-type borrowers until the beginning of ’09. There’s simply too much risk involved.
Lending sources are offering 60 percent debt with 40 percent equity or 70-30 if the lender is 100 percent confident in the borrower’s ability to repay the loan. Though we are starting to see more defaults, it’s nothing like the housing market. Largely, the defaults are limited to manufacturing-type buildings.
Do you believe that now is the time to invest in industrial real estate, or should investors wait?
There are obviously different levels of investors. If you’re flush with cash and you can gather information from a market expert on a particular opportunity, this is a great time to find that off-market deal. But you have to make sure the asset is in a great location and it’s functionally sound.
For big institutional buyers who are just buying cash-flow-type assets, I don’t see many opportunities; the best opportunities are for the small local or regional investor who can find the off-market deal.
BLAKE ANDERSON, SIOR, is Senior Vice President in Grubb & Ellis Company’s Dallas office. Reach him at (972) 450-3207 or firstname.lastname@example.org.