Observations by Michael
Bull, CCIM, Founder, Bull Realty Inc., Atlanta, GA
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| Michael Bull |
With the housing market starting to pick back
up and absorption on track to outpace last year, the industrial sector has
continued its recovery, its sights set on a bright 2014.
That recovery was the focus of the most recent episode of the “Commercial
Real Estate Show” radio program.
My guests and I discussed the specific factors driving the recovery, such as the
growth of e-commerce, as well as the return of new development.
Who’s Steering?
A steadily improving economy has led the
industrial market to experience improving fundamentals for the last 13
quarters, said Rene Circ, director of research at PPR, a CoStar company.
Approximately 33 million square feet of absorption occurred nationwide in third
quarter for a total of 79 million square feet year-to-date, he said.
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| Rene Circ |
“All we need is 3 million square feet of
absorption in the fourth quarter to surpass absorption in 2012,” Circ added.
“We are forecasting [the fourth-quarter total] to be closer to 30 million
square feet.”
So what specifically is driving the recovery?
The housing sector, for starters. “Housing was an anchor on the
industrial market, but now that’s not the case,” Circ said.
“The housing market
has legs. That’s why we are seeing recovery in the light-industrial segment.”
In third quarter, approximately 60 percent of
the 1,200 submarkets tracked by PPR saw improvement in the light-industrial
segment — buildings that are approximately 100,000 square feet.
Vacancies in
that segment are about 7 percent, better than the 7.9 percent vacancy for the
industrial market overall.
E-Commerce Remains Hot
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| Summey Orr |
“When e-commerce first emerged, so many
people said ‘That’s going to take commercial real estate under,’ but that
doesn’t make sense,” said Summey Orr, managing partner of Hartman Simons.
“Merchandise has to be housed somewhere. We’ve seen a lot more industrial
development as big retailers are building large rapid-deployment centers closer
to major commerce areas so the product can be shipped more quickly.”
Amazon has been the leader of this trend,
said Sim Doughtie, president of King Industrial Realty Inc. “An economist from
Texas A&M said that when Amazon had $58 billion in sales they had replaced
approximately 128 regional malls,” he added.
“With Amazon delivering some items the same
day, now that’s going to affect commercial real estate,” Orr said. “That means
there are more opportunities for developers to get out there and find buildings
to be a part of.”
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| Sim Doughtie |
However, investors should be wary of the huge
industrial distribution buildings that companies like Amazon are building, Circ
said. “It’s a safe assumption that Amazon will leave after the first lease or
possibly extend their lease for five years,” he said. “As an investor, you have
to think about who would be willing to lease that space.”
Development has started to pick up, with
strong industrial markets such as Houston, Dallas and Los Angeles seeing both
speculative and build-to-suit activity, Doughtie said.
Markets like Chicago and Atlanta are still seeing more build-to-suit product, as vacancies in those
markets still remain high. “For example, Atlanta has had 24 build-to-suit
developments take place during the last couple of years, but only two
speculative projects,” Doughtie added.
“We are actually doing a lot of deals where
lenders are lending to developers to build new products,” Orr said. “That’s a
real sign that this isn’t just a mythical recovery.”
For companies looking for new development
sites, it’s imperative that they define their needs exactly, Doughtie said.
“A
lot of companies get off course because they don’t define clearly what it is
that they want. They might have a national broker, but they need a local broker
too who knows the market, incentives and where the properties are.”
A lawyer or broker can help navigate through
the process of getting incentives for new developments or relocations, Orr
said. “It’s becoming more and more important to use incentives. It can make a
dramatic difference in the bottom line.”
Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales and
advisory firm headquartered in Atlanta. Michael on Twitter and LinkedIn.
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