The View From I.CON: Everyone Loves Industrial
By: Ron Derven, contributing editor, Development magazine
Gary Swedback, president of NAI Mexico, speaking at the I.CON 2014 opening session, reported that “Mexico is becoming a new gateway from Asia to the North American markets.”
The good news coming out of I.CON: The Industrial Conference, held in Jersey City, New Jersey, on June 5-6, is that everyone loves industrial. The not-so-good-news is that there is fierce competition for properties and continuing cap rate compression is driving the numbers into the 4s.
Other takeaways from the annual NAIOP conference, attended this year by more than 500 people, include the following:
- E-commerce is hot, with no end in sight (see “The New Industrial Revolution” and “The Future of Industrial Real Estate Is E-commerce” in the summer 2014 issue of Development for more detailed information);
- Vacancy rates are falling and rental rates are rising, but speculative construction has yet to ramp up in most markets;
- Investor competition for U.S. industrial properties is now global;
- Interest in Class B space is growing, even among institutions;
- Investors are looking for niche plays; and
- The “deep integration” of the North American markets continues.
Sixteen Positive Quarters
At the opening session, “What’s Driving Industrial Real Estate and Where Is It Going?,” Rene Circ, director of research at CoStar Portfolio Strategy, noted that the industrial market has had a tremendous ride, with 16 consecutive quarters of positive net absorption and almost no new construction. Industrial vacancies have declined from a peak of 13.4 to 9.2 percent.
“Vacancies rates are lower today than they were at any point in the last cycle,” he said. “We are still seeing five to six quarters of positive net absorption ahead. At that point, we expect that developers will deliver more space than the market needs. By then, vacancies should be in the mid 8 percent range.”
In addition to a hot U.S. market, industrial product also is doing well in Canada and Mexico, reported Gordon D. Cook, SIOR, executive vice president of Colliers International, and Gary Swedback, president of NAI Mexico, both of whom also spoke at the opening session.
In Canada, according to Cook, “We are seeing very good rental growth. It is moderate in some cities, but quite bullish in others. We are seeing a bifurcation of cap rates from Class B to Class A.”
Mexico continues its remarkable transition, reported Swedback: “The deep integration of the U.S., Canadian and Mexican economies continues. U.S. and Canadian manufacturing consolidation continues to Mexico.”
Swedback also noted that Mexico has vast natural resources, a $1.7 trillion economy, 120 million people and a per capita income of $10,000. Emerging sectors, he added, include R&D centers, the automotive industry and its suppliers, and medical device makers, as well as the aerospace and electronics/home appliances/logistics industries.
More E-commerce Facilities, Bigger Ships
At a related session titled “Behind the Wheel: Drivers of Development Cycles,” Mark S. Hugeback, AIA, principal and secretary/treasurer with M+H Architects, said that everyone in the industrial business is dealing with e-commerce in one way or another.
Donald T. Cunningham, CEO and president of the Lehigh Valley Economic Development Corporation, described his area’s recent revival as an “Inland Village” and e-commerce hub.
I.CON attendees received updates on the progress being made by several East Coast and inland ports that are readying their facilities for the mega ships that will be coming through the expanded Panama Canal and an overall growth in business in the years ahead. Donald T. Cunningham, CEO and president of the Lehigh Valley Economic Development Corporation in eastern Pennsylvania, on the New Jersey border, characterized his area as an “Inland Village,” comparing it in function (though at a much smaller scale) to Southern California’s Inland Empire. The Lehigh Valley has experienced an amazing revival in recent years, thanks to its location not far from the Port of New York and New Jersey, extensive land, inexpensive labor and generous incentive packages from the state.
“Our total usage grew from 35 million square feet in 1997 to 62 million last year,” he said. “We have a 4 percent vacancy rate with about 27 million square feet of industrial proposed for the market. Most of it is driven by e-commerce.
“The Rockefeller Group has an agreement to purchase about 800 acres of land around the [Lehigh Valley International] Airport, and is working on an agreement with FedEx Ground to build FedEx’s largest hub in the East to serve the e-commerce market. Recently, Liberty Property Trust built 1.2 million square feet for Wal-Mart, for its e-commerce activities. Right now, Majestic Realty is building 1.2 million square feet. Amazon has two buildings, each 1.3 million square feet.”
At a session titled “How Supply Chain Logistics Impact Industrial Real Estate,” Jack W. Ellenberg, senior vice president for economic development and projects at the South Carolina Ports Authority, said that not every East Coast port will be able to handle the big Post-Panamax ships on an unrestricted basis. “The harsh reality is that not everyone will go deep. There are only five ports on the East Coast that will be able to handle the big ships on a 24-hour-a-day, seven-day-a-week, nontidal restriction basis, coming in fully loaded,” he noted.
As the East Coast ports expand, more — and larger — inland ports will be needed to move goods quickly around the region. South Carolina has created its own, the South Carolina Inland Port, 212 miles inland in Greer, 100 miles from downtown Charlotte and 130 miles from downtown Atlanta, an ideal location to serve this growing population base.
As Ellenberg noted, “traditional inland ports bring together three modes of transportation — water, rail and truck. Our inland port has a fourth; we are 10,000 feet off the runway at [Greenville-Spartanburg] GSP International Airport, on the air cargo side.”
To understand the impact that inland ports can have on real estate, Ellenberg said that in the first months after the South Carolina Inland Port opened, it received more than 200 inquiries from companies that wanted to develop some of the 4,000 acres around it.
Carl Warren, director of integrated project planning for CSX Intermodal Terminals, addressed the viability of short-haul rail service.
Several states to the north, the Port of Virginia created an inland port 25 years ago. More than 40 businesses have relocated to the Virginia Inland Port, which is located at the tip of northern Virginia, about 220 miles from the Port of Virginia and just west of Washington, D.C. Russell J. Held, senior vice president of business development at the Virginia Port Authority, told I.CON attendees that the Virginia Inland Port has brought more than $800 million in investment and 8,000 jobs to the area.
With looming truck driver shortages and big demands on an aging logistics infrastructure, Carl Warren, director of integrated project planning for CSX Intermodal Terminals, was asked about the viability of short-haul rail to take up some of the slack. “We have seen success in distances as short as 200 miles, provided that there is a really robust solution at the port,” he responded. “It is a little different in the West. With those long distances, they have a more acute sense of opportunity costs.”
Brandi B. Hanback, Esq., executive vice president for industrial development and head of FTZ, trade and logistics with The Rockefeller Group, moderated a session titled “Impact of NAFTA on Industrial Real Estate.”
If your focus is on U.S. real estate, why should you care about NAFTA, the North American Free Trade Agreement? That was the question posed by Brandi B. Hanback, Esq., executive vice president for industrial development and head of FTZ, trade and logistics with The Rockefeller Group, who moderated a session titled “Impact of NAFTA on Industrial Real Estate.”
Answering her own question, she said that “NAFTA forces us to change our focus from East Coast versus West Coast or China versus the U.S. to think about north-south: places like Kansas City, Dallas or border towns like Laredo or El Paso or Buffalo that might have specific needs driven by NAFTA.”
Lorenzo Berho, president of Mexican real estate firm Corporación Inmobiliaria Vesta, speaking at the same session, said: “In this partnership of our three countries [NAFTA], we have the best business model in the world. We all have democratic governments; we have different currencies that have allowed us to adjust when needed, we have strong central banks, we have reserves and our countries complement each other.”
Bob D. Cook, president and CEO of Cook Strategies Group LLC, added that “industrial/commercial opportunities will come to developers and brokers that not only understand the competitive nature of each nation, but understand the challenges and have the ability to help companies navigate those sharky waters.”
Ross J. Moore, Vancouver, British Columbia-based regional director of research at CBRE, explained why NAFTA has been important to Canada: “Major Canadian corporations have been doing business around the world for decades. What NAFTA did was to change the mindset of small and medium-sized businesses. Many never considered selling outside of Canada. With NAFTA, they said, why am I not selling to California? Why am I not selling to Texas or New York?”
Niche Industrial Plays
With the investment competition at global proportions for giant, well-located e-commerce facilities, small investors are feeling left out and looking for niche plays to find returns. At a session titled “Counter Trends: When Opposite Investment Tactics Attract,” Lewis Friedland, managing partner at Cobalt Capital Partners LP, highlighted the three major components of the industrial market: flex space, bulk industrial and light industrial. As far as he is concerned, flex space is still a four-letter word and bulk industrial is gobbled up by major players. He said that his company is prospering in the light industrial market.
“We define light industrial as buildings under 250,000 square feet, primarily multitenanted space that is designed for local and regional distribution uses. Think of these buildings as the ‘last mile’ of distribution,” he said. “A lot of our tenants are big national and international companies that have 800,000-square-foot buildings in Los Angeles and New Jersey, but they may also have 20, 30 or 40 20,000- to 30,000-square-foot spaces in local markets. That is our typical tenant.”
Jeff Miller, vice president, industrial, with Oxford Properties Group, spoke about a profitable niche that his company has identified in the Vancouver market: “Vancouver is a land-constrained market with land prices reaching $1 million to $2 million an acre. Our strategy is to build in infill brownfield redevelopment sites.”
Panel members James J. Mazzarelli Jr., senior vice president and regional director, Liberty Property Trust; Tim Hoffman, vice president, acquisitions, Duke Realty Corporation; Robert A. Kritt, senior vice president, acquisitions/dispositions, Prologis; and Dwight Y. Angelini, partner, TA Associates Realty addressed investment issues; not shown is panel moderator Brian Ward.
Investing in Industrial
At a session titled “Investing and Divesting 101: Solutions to Complex Scenarios,” Brian Ward, president, capital markets, Americas, with Colliers International, noted that too many dollars are chasing too few real estate opportunities.
“I was in Hong Kong last month, and they [Hong Kong investors] are looking at 2 caps, so when they come to the United States and they see 4 caps, it looks like a great opportunity here.”
Ward asked the panel to consider investment prospects for industrial today. Here is how they responded:
Be Cautious on Investment. The panel agreed that too much money is chasing too few deals and that it is difficult for investors to find the return that they need. Foreign capital is flooding into U.S. markets, not just in New York and California, but also into secondary markets like Indianapolis, for the first time.
Be Bullish on Development. All of the panelists were bullish on development of industrial space, based on how Amazon and Wal-Mart are expanding and the growth of e-commerce. All industrial markets are doing well at the moment.
Be Aware of Hot and Not-so-Hot Markets. Almost every market in the U.S. lacks new supply right now, with the exception of Dallas, Houston and the Inland Empire. Markets like Atlanta have the potential for new development over the next year. Northern New Jersey has no industrial land available, which means that great opportunities exist to raise rents on Class A and even Class B space there.
Al Pontius, senior vice president/managing director with Marcus & Millichap Investment Services, told I.CON attendees: “During my career, this is as robust and heated a transactional environment for industrial as I have ever experienced. I don’t think this will go away, at least during the short term.”
This Is a Good Time to Both Buy and Sell Properties. With prices high, now is a good time for a company to sell properties if it needs to realign its portfolio. It is also a good time for companies that need to diversify their portfolios to buy.
Market Fundamentals Are Changing. E-commerce is changing what type of “box” is being built and what is going on both inside and outside the box. As consumption by “clicks” increases, there will be more change ahead than has been seen to date. What will change? No one will build a box with less than 36- or even 40-foot clear heights. In addition, power consumption will grow, truck storage space will skyrocket, air-conditioned space will balloon, labor shortages will surge and water demand will bubble up.
Learn How to Get Good Yield. Find buildings that can be retrofitted to meet local tenant specs. Those buildings are not easy to find, but when you do find them, you can achieve yields of 7 to 7.25 percent, even in today’s market.
Where Would You Invest Your Own Money in Industrial Real Estate Today?
I.CON panelists answered this question with the following advice:
- Invest in the coasts.
- Be careful in Texas.
- Focus on global and strong regional markets.
- Invest in Class B product with an upside.
- Invest in infill sites in Northern New Jersey, where you can do 25,000- to 50,000-square-foot transactions in 250,000-square-foot buildings.
- Invest in e-commerce-oriented sites in submarkets with major barriers to entry.
I.CON Attendees Tour Port of New York and New Jersey
An early morning boat tour of the Port of New York and New Jersey was the exciting kick-off to this year’s I.CON: The Industrial Conference, as scores of passenger ferries, tug boats, pleasure boats, luxurious ocean liners and massive cargo ships navigated the busy waterway with the iconic Manhattan skyline as a backdrop.
In addition to touring the port, attendees had the opportunity to cruise under the Bayonne Bridge, the magnificent steel structure whose roadway is being raised by over 70 feet to accommodate the new Post-Panamax ships that will visit this port in the near future.
Beverly Fedorko, director of external affairs for the New York Shipping Association Inc., told tour participants, “The Port Authority of New York and New Jersey spent over $2.5 billion to deepen the channels coming into the port. All of the main channels are 50 feet deep.
“In addition to that infrastructure investment, the Port Authority also invested in increasing roadway capacity because, once you get here, you have to get around the roads and into and out of the terminals. They have also built intermodal rail facilities that are critical to getting goods out of the area.”
Fedorko added that the Port Authority is spending $1.3 billion to raise the Bayonne Bridge’s roadway from a clear height of 151 feet from the water to 215 feet, to allow bigger ships into the port. (For more information, see “Welcome to New Jersey: Breaking the Bridge Barrier to Allow Big Ships,” in the fall 2013 issue of Development.)
The raising of this bridge has ramifications far beyond New York and New Jersey, a fact that was underscored by Jack W. Ellenberg, senior vice president for economic development and projects at the South Carolina Ports Authority, at an I.CON session the following day, when he said: “We are seeing 9,000-plus TEU vessels coming into Charleston every day. We are expecting 14,000-plus TEUs. The only delay in 14,000 TEU vessels coming here [to South Carolina] is the Bayonne Bridge. It is too low for those big ships to get into New York. In order for these big ships to come here, they need to have a New York call. We are very supportive of our friends up in New York and New Jersey to raising the Bayonne Bridge.”
The giant ships now coming into use typically do not pick up an entire shipload of cargo at one port and deliver it to another. Instead, they have numerous ports of call, picking up a series of loads at different ports and dropping them off at a number of other ports. The Maersk Line began using its first Triple-E vessels in 2013 and has ordered a total of 20. These ships can carry up to 18,000 TEUs. Even after the Panama Canal expansion is complete, it will only be able to handle ships carrying up to 13,000 TEUs, so Maersk and other carriers using Triple-E vessels will have to route them from Asia to Europe and the U.S. through the Suez Canal, which has no locks.
In addition to getting the big ships into the port in this busy region of the country, getting cargo off of ships and to other markets is essential. That is why the Port Authority is expanding its ExpressRail system and inland connections to speed cargo into the region, the Midwest, New England and Canada.
A commitment of more than $4 billion by the Port Authority will ensure that the port is ready to handle projected future volumes and the increasingly larger vessels that will carry that cargo. Terminal operating partners also will continue to make additional investments to modernize their facilities.