Frenzy for industrial real estate settles into question marks
Journey with me as I flashback for a moment to three years ago.
Recall, we were past the darkest days of the pandemic — at least we believed — and headed for freedom. Freedom from our keyboards and the stifling confines of our converted home offices. Commutes to our brick-and-mortar locations awaited us.
Whether we plied our trades in a concrete tilt-up manufacturing building, a suite of offices in a high rise or a retail storefront, homes away from homes were returning. At least we believed so.
Nature had another variant in mind and even though the virus’ Delta version was less virulent, it was much more contagious. Our staycations continued until the virus found fewer hosts.
During this hiatus, industrial manufacturing and logistics thrived, office spaces floundered and retail shifted to blue vans delivering to our residences.
Now, three years hence, the class of commercial real estate – buildings used for manufacturing and shipping – is showing signs of a slowdown. So what, pray tell, are the warning flags that signal said pause? Indulge me as I review a few of them.
More sublease space
Three years ago, excess industrial space was non-existent. Fast forward to today, and it’s become a common buzzword in the industrial market. It’s like finding uncharted territory on a map that was once thought to be fully explored.
The increase in sublease space is more than just square footage; it’s a sign that the landscape of demand is shifting.
Companies that once occupied these spaces are now reevaluating their real estate needs. The surplus of sublease options indicates a change in how businesses perceive their workspace requirements. It’s like a reverse game of musical chairs.
Longer time on market
Remember the days when a property would hit the market, and within the blink of an eye, it was off again? Or, did it ever officially hit?
Well, those days seem to be fading. Properties are lingering, waiting for someone to come knocking.
The extended time on the market isn’t just a numerical value; it’s a reflection of uncertainty. It’s as if potential occupants are standing at a crossroads, evaluating their next move cautiously.
Increased broker incentives
Brokers used to be like matchmakers, introducing tenants to their perfect property. Now, it’s almost as if they’ve donned a new hat – that of a negotiator.
Broker incentives have become a sign of the times. Trips, bonus fees and touring currency are making their way back. They’re the conversation starter, the bargaining chip that landlords put on the table to sweeten the deal.
It’s not just about securing a tenant; it’s about convincing them that this space is worth their commitment.
The increase in broker incentives is like a neon sign flashing, “Flexibility is the new black.” It’s an acknowledgment that the market has changed, and everyone needs to adapt to keep the dance floor crowded.
More tenant concessions
Concessions, such as free rent, moving allowances, special purpose tenant improvements, et al, used to be rare, reserved for special occasions. Now, they’re being offered like party favors at the end of a celebration.
It’s not just about the property itself anymore; it’s about what comes with it. Companies aren’t just looking for four walls and a roof; they’re looking for a partnership.
Tenant concessions are a handshake that says, “We’re in this together.” Landlords are bending, flexing and shaping their offerings to accommodate the evolving needs of their tenants. It’s like watching a jigsaw puzzle being put together, piece by piece until a harmonious picture emerges.
Softening in asking rates
The asking rate used to be a non-negotiable declaration, a line in the sand that set the tone for negotiations. Today, it’s more like a starting point, a foundation that can be molded and shaped.
The softening in asking rates isn’t a sign of weakness; it’s a sign of realism.
Landlords are acknowledging that the script has changed. It’s not just about what they think their property is worth; it’s about what tenants are willing to pay. The softening in asking rates is like a bridge connecting two sides, a compromise that ensures both parties can find common ground.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.