When talking about real estate, the old adage of “location, location, location” remains as sound as ever. But, another old adage — “timing is everything” — is also very important in today’s industrial market.
Current economic challenges have created a window of opportunity for companies to better their near-term positions as well as plan for the expected recovery that’s ahead.
“Without question, current market conditions have been difficult for both tenants and owners,” says Brian Rettig, SIOR, a first vice president and industrial specialist with CB Richard Ellis. “All parties are trying to make responsible near-term decisions that will provide a bridge to the better times ahead. That said, there are unprecedented opportunities today that can help create a foundation of capital, along with operational efficiencies that will increase profitability in the long term.”
Smart Business spoke with Rettig to identify some of the factors in play in today’s market.
What is unique about market conditions in this day and age?
The broad economic downturn has touched just about everyone. This period is not about a particular sector downturn, like we saw following the technology boom. It is, in fact, a global issue. Business owners are facing uncertain revenue pictures, which makes it difficult to project their facility needs. Subsequently, demand for space is not only down but also, in many cases, contracting. As such, we have gone from years of positive absorption to a period of negative absorption over the last three quarters. New demand is limited and landlords are being very aggressive in retaining existing tenants. The result is increasing vacancies and decreasing rental rates.
So how can these conditions serve to help a tenant?
With an uncertain revenue picture, the focus typically turns to how the expense side can be more tightly controlled. Currently, rental rates for not only new tenants but also for renewals of existing tenants have dropped significantly, offering almost immediate near-term savings. Additionally, future rent escalations and caps on operating expenses can also be negotiated. Tenant improvement dollars may be more generous and can certainly help with needed capital dollars. More than ever, there is the opportunity to contest real estate tax assessments, which benefits both property owners as well as tenants. In exchange for these rate reductions and operating expense caps, landlords are willing to extend leases for a period of time that allows these benefits to accrue over a longer term.
Does this change how a tenant should look for space today?
Everything counts today when considering a move. Transportation costs are a key concern, so businesses want the warehouse closer to the customer. Increased cube height in newer buildings equates to less rentable floor space being needed. Landlords are also more receptive to providing more paved trailer storage on site, which can reduce the amount of space needed under roof. This permits a staging process that again can play to reduced operating costs. Cross-dock facilities and barcode technology can be combined for ease of handling and optimal inventory control. ESFR sprinkler systems offer improved safety as well as greater insurance savings. Each piece, no matter how seemingly small, can add up to savings on the bottom line.
Has the green movement played a role in industrial efficiencies?
The green movement has greatly impacted industrial efficiencies, and its influence is increasing. The most common area is in energy cost reductions, primarily through changes in lighting. The new T5 and T8 fluorescent fixtures offer greater efficiency, and because of their restrike capability they can be matched with motion sensors working instantaneously to turn lights on and off as areas become occupied. Even small changes such as directing the light fixtures can bring more foot-candle power to most needed areas. White reflective roofs control heat better and save on climate control costs. Roofs are also being increasingly used for placement of photovoltaic solar panels, which can be a source of additional revenue.
How important are broader economic incentives today?
In today’s competitive environment, incentives can make the difference between winning and losing an opportunity as well as improving the economic viability of a firm’s long-term success. Job and location incentives can include QTI credits for positions where salaries exceed the state’s average. Locating in an Enterprise Zone allows for job and property tax credits as well as equipment sales and building materials tax refunds. Operating in a Foreign Trade Zone allows easier entry of certain products, which quickens turn-around time and reduces duties on foreign goods. Success in the decision-making process requires an exposure and a review of how each piece of the puzzle can fit together so that all parties benefit from the collective solution. Make sure you make an informed decision.