Companies operating in the industrial sector today are looking for facilities that are user-friendly, rich in amenities and can be adapted to enhance the work experience of fickle employees.
“Historically, most users just focused on amenities required to produce product,” says Joseph V. Barna, a principal at Cushman & Wakefield/CRESCO Real Estate. “Preferences have changed significantly today, and that’s making most older buildings in the market borderline obsolete.”
He says some of the buildings in the market can be renovated, but often the required investment is cost prohibitive.
“Employers in the industrial sector are increasingly concerned with keeping employees happy, which translates to keeping employees — something that’s important in a market in which skilled workers are in high demand,” Barna says. “That shows up in the amenities they want in their facilities, and it has meaningful implications for landlords.”
Smart Business spoke with Barna about identifying suitable demand industrial properties in a tight market.
What factors are contributing to the change in the way manufacturers choose real estate?
Industrial has become more high tech, which has exacerbated the already severe shortage of skilled tradespeople at the local, regional, national and global levels. There are a few other reasons for that shortage.
The population is aging while the birthrate is decreasing, so there are fewer people entering the workforce with these desired skill sets.
The young people entering the workforce have tied personal fulfillment and contribution to their professional lives. So if they’re not happy, if they don’t feel their job is meaningful, they’re not interested. That’s put an emphasis on job retention. Therefore, keeping employees happy is now seen as essential to retention. A facility’s amenities can go a long way toward that end.
How does this change affect the market for real estate in the Greater Cleveland area?
The site-selection process in the Greater Cleveland market has become more complex. Our industrial inventory is about 505 million square feet of property. But most of that product is aged and either functionally obsolete or not up to current standards.
Class A industrial real estate represents about 3 percent of our total inventory; everything else is B, C, D or obsolete. In addition, our 3.5 percent vacancy rate is the lowest in history, so when buildings do come on market, there can quickly be multiple offers from qualified buyers. The industrial real estate market is now very competitive.
How can industrial real estate users get what they want in this market?
Plan in advance. When a lease is coming up or sales are rising to the point that fulfillment will require a larger facility, get ahead of it. Then, define the requirement. Companies should think about the need they’ll have in five to 10 years, not in the next two. Once their needs are defined, they should start analyzing the market as soon as possible.
It’s also advantageous to explore new construction. It can be expensive to build as construction costs continue to increase. However, incentives through municipalities, the state and county can offset the cost of new construction.
Buying an existing property means making a significant investment in what is still, essentially, in terms of the brick and mortar, an aged building. New construction could have tax advantages that can help close the financial gap and get the buyer exactly what they want. It means having new mechanicals as well as structure, which suggests the cost of operations will be lower than dealing with an old building and its often-obsolete non energy-efficient mechanicals.
Also, think outside of the box. If a company only needs a 30,000-square-foot building, consider buying a 50,000-square-foot building and finding a partial tenant to offset the costs. Or buy a larger building from a company that’s looking to downsize and keep them as a partial tenant.
There are a lot of approaches for industrial companies to get what they need in this market. Accomplishing that can be made easier by assembling the right team — an accountant, real estate specialist and attorney — and exploring all options to maximize the results of the end user.
Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate