It’s not a phrase we hear that often this year, but the industrial sector has a unique problem: There’s not enough space to satisfy demand. According to Sam Chanin, CPM, president of Maverick Realty Advisors in Orange County, California, the need for last-mile delivery systems has flooded the market, and it’s the result of brick-and-mortar retail’s COVID-induced downturn.
“We were already in a tight economy, with a sub-2.5% vacancy rate at the start of the year,” says Chanin, who after 18 years at a major services firm left to launch Maverick in Q4 of last year. “And all at once, everybody wanted industrial, so much so that they were converting creative space back to cold-storage, warehouse, and distribution.”
Everything old is new again
That demand has turned the market on its ear. Over the past few years, the sector has faced an increasingly old and obsolete building inventory, especially in Class B and C warehouse and distribution facilities. The thinking was that all buildings with less than 18-foot clear heights would be functionally obsolete, says Chanin, whose firm bills itself as a strategic advisor, with services that include property management and brokerage.
Enter the so-called “Amazon Effect,” the impact of e-commerce on brick-and-mortar retail in an era when no one wanted to run the health risk of entering a store. That dynamic has brought obsolete facilities back to life, says Chanin, and raised a new generation of value-add investors who are taking “low, clear-height industrial properties, insulating them, installing a freezer, and jacking rent 45%. Plus, they’re leasing it in a heartbeat.”
That demand has caused serious ripple effects throughout the market, limiting availabilities still further, Chanin explains. For example, if a large tenant, of say 100,000 square feet, can’t move due to limited space options, the movement of smaller tenants that could have occupied that space is limited. That limitation in turn stifles the movement of yet another potential tenant for that midsize space.
“There’s a definite trickle effect down through the market,” he says. “It’s like a freeway accident. Everyone piles up.”
That intense, COVID-19-driven interest didn’t happen overnight. When the then-booming economy hit the skids in February, the industrial market paused, despite the essential designation of many manufacturing/distribution tenants. Then, as we began to get the measure of the pandemic, the market began again to come to life.
“When COVID-19 hit, activity dropped to 50%,” says Chanin, indicating that these numbers are anecdotal. “Once we started to get a better picture of COVID-19, the market initially went back to 90%,” and the upswing has been slow and consistent ever since. “Year-over-year, I’d put the current activity as high as 20% to 30% above where we were last year.
“We all thought logistics would slow because people weren’t buying from retail centers,” he continues. “Instead, we’ve eliminated the retail centers, and trucks are dropping product off at last-mile depots, then making their way directly to consumers.” In fact, the uptick has been so great that many of his clients are struggling to find drivers.
A market like no other?
It’s a unique situation, but not the only one that separates industrial from office or multifamily. “Industrial facilities are used harder than other types of assets,” he says, pointing to the abuse these facilities take from the likes of forklifts, trucks, and skateboards.
“We had an indoor skateboard park in one of our buildings,” he explains. “The drywall took a terrible beating.” (Chanin explains that when he took the building back, the outgoing tenant did make good on the repairs.)
But that’s not to say that industrial buildings are all rough-and-tumble. In fact, as often as not, today they serve as the scene of highly sophisticated robotics for inventory control as well as for a growing digitally focused tenancy.
“It’s not just smokestacks and oil spills,” he says. Chanin points to manufacturing tenants such as defense contractors, which produce highly sophisticated electronics devices or ones that churn out animatronics for theme parks. “There are always robots walking around. It’s really cool stuff.”
“These sorts of applications demand closely controlled HVAC systems, clean-room facilities, and static-control measures,” he says. And the nature of much of this production also demands finely tuned security measures and access control.
Still, in many respects, industrial is much like the other food groups. Property managers of all sorts still have to deal with broken pipes and flooding. Besides, navigating the shifting protocols of the pandemic was a challenge for all property managers.
“Every time we would put together a semblance of a communication on policy or procedure, we’d have to issue revisions to the recommendations,” Chanin says. “It was very chaotic in the beginning. All the while, we needed to evaluate our procedures and keep a pulse on the safety, comfort, and compliance of our tenants.”
In his nearly 20 years in property management, Chanin has had his hands on retail, office, and industrial properties. Now, as he swings into a dedicated focus on the latter, one truth remains: “All buildings are like living entities,” he says. “They have multiple systems, and they have an overall health. They break a lot and need constant maintenance.”
They even have a life expectancy. But thanks to the efforts of the property management industry and value-add investors looking to solve a real and growing need, those assets once dubbed obsolete are finding new life.