Tripling land values. Conversion of industrial space to lofts and tech office. Frothy – yes, frothy – markets. Four industrial CEOs took the stage at I.CON ’15 in a spirited conversation about the state of the industrial markets and what they’re seeing as some of the largest industrial developers in real estate.
The experts – Jim McShane, McShane Companies; Carl Panattoni, Panattoni Development Company Inc.; Jeffrey Phelan, DCT Industrial; and Gene Reilly, Prologis – donned their NAIOP ball caps in a “sports talk radio” format to debate the markets, dive deep into cap rates and talk about the demand for land.
Read on to learn what they think it happening in this upper market and the discipline it takes to stop and let the market correct itself.
The Bay Area is Hot: The San Francisco Bay Area is the most idiosyncratic market in the United States – it’s so dependent on the tech industry that it’s nearly governed by it. It’s been booming for 5 years – land values have tripled and building values have done the same. True industrial space is slightly decreasing, thanks to its trendy conversion to lofts and high-tech office. The result? Industrial product is really special and the demand is hotter than ever. Good for developers and owners! Terrific quote by Panattoni: “I’d much rather have a tenant in search of a building than a building in search of a tenant.”
Money, Money, Money, MONEY: There’s so much money chasing all products today – including industrial – that it distorts the view for developers. That, according to Panattoni, yields a “frothy” market. Two years ago, capital was still nervous about moving in on speculative projects, said Panattoni. Will the basis points rise? There’s a significant chance, and that could result in some of today’s projects being underwater.
What’s Driving Demand: Reilly says population growth drives logistics demand greater than GDP. And if you look at the numbers since the 1980s, in every year except one, 200 million square feet of industrial was built annually. And although supply and demand are fairly balanced in Houston and Dallas, Reilly says Prologis is seeing a trace of oversupply in some Texas sub-markets. Atlanta is the last of the big industrial markets in the U.S. to recover, and while New Jersey has a little excess construction right now, the market is very well occupied and the port of New Jersey has a really strong future.
Public vs. Private: What’s different for a public company today versus two years ago? Public companies have much of the same issues as public, says Phelan. But public companies are finding themselves doing more new development, followed by value-add development. What that means is that the company is re-evaluating where the core markets are and expanding those areas and pushing out to get more development on the ground.
The Land Game: A solid recovery for tenants and higher demand have resulted in very capable developers competing for the same pieces of land and therefore driving up the costs. What’s happening now is that, in some markets, there is the absence of real, usable parcels of land. Markets in the Midwest are way behind both coasts and even Texas, says McShane. Chicago, for example, is facing big issues with parking, truck space and lack of land.
Taller and Getting Taller: Do tenants really want 40’ clearance heights? Yes, but it’s typically for build-to-suit and the client usually plans to use it for mezzanine or storage, at least in the short-term. Prologis is building the first spec 40’ clearance in a thousand-acre industrial park in Tracy, California, with plans to own the property for a longtime.