Approximately 40 percent of all industrial space in the U.S. is multi-tenant industrial space. This is an incredibly significant portion of the industrial sector and demand for this product type is continuing to rise.
This rapid increase in demand has resulted in extremely high occupancy rates, and strong rent growth throughout the sector. In fact, more than 60 percent of all new industrial leases this past year were for spaces smaller than 15,000 sq. ft., meaning more than half of all industrial leases were in the light multi-tenant industrial sector.
In addition, multi-tenant industrial product provides lower risk to investors due to its diversity of tenants and industries. Multi-tenant industrial properties attract companies in manufacturing and distribution, construction, research and development, and business services, among many others.
The question is: what is driving this uptick in demand and what does the multi-tenant industrial sector look like this year and over the next several years?
Based on our niche focus in the light multi-tenant industrial sector, we’ve compiled the top factors driving this significant increase in demand and our outlook on this sector in 2017 and beyond.
These factors include:
Recovery of the Small Business Market
The small business sector took a major hit during the recession. We are now seeing this sector bounce back with a sharp rise in small and medium businesses throughout the country. This active recovery and growth among this sector is driving increased demand for light multi-tenant industrial space in many markets across the United States.
Further, while it is too early to tell which proposals will remain rhetoric and which will turn into action, the new administration’s proposed policies aim to pump capital back into small business.
For example, one of the president’s proposed policies is lower taxes for small business owners. This will further aid in the recovery of small businesses, resulting in an increase in new businesses throughout the country. This translates into higher demand for smaller industrial warehouse space.
Retailers Seeking Faster Delivery Times
It is obvious that e-commerce is changing the way consumers shop. Online retail sales are predicted to reach $354 billion by the end of this year and $485 billion by 2021.
The recent bankruptcy filing by 69-year old toy giant, Toys R Us is a prime example of this change in consumer behavior. Large retailers across the country are continuing to close brick-and-mortar locations or downsize physical stores to adopt an omni-channel or fully e-commerce approach.
This tremendous increase in online sales, coupled with the changing demands of today’s consumers, is further driving demand for multi-tenant industrial properties. Consumers are no longer willing to wait weeks for the delivery of their products and are expecting much faster delivery times, and in some cases, same-day delivery. In order to do this, retailers are looking to shorten the gap between consumers and warehouses. These retailers are seeking small, infill properties near population centers, making it a quicker transition from the factory to the hands of the consumer.
This shift in consumer behavior is currently driving increased demand for these smaller fulfillment centers and will continue to do so over the next several years. Investors today are recognizing the deep value potential of these multi-tenant industrial properties and trying to get ahead of this growing demand.
Rising Costs of Big-Box Space
With the growth in the e-commerce sector, in terms of both retailers taking an omni-channel approach and the emersion of new e-commerce companies, large big-box facilities have received tremendous demand over the last several years.
This has resulted in increased competition and significantly higher prices in this sector. Much of the big-box industrial space today has returned, and even surpassed, previous peak prices. This means that much of this product today is being purchased at a higher price than its replacement cost. This makes deals much more difficult for investors to pencil in.
The multi-tenant industrial sector, however, provides significant opportunity to acquire properties below replacement cost and capture the growing demand for smaller industrial space. Given the costs of new construction, there is also relatively no new development in this sector. This is further driving demand from investors for multi-tenant industrial product.
Increase in Geography-Specific Growth Projects
Specific sub-sector geographic growth projects directly impact the demand for light multi-tenant industrial properties. These large projects stimulate the local economies in which they are located and bring an immediate influx of jobs, new businesses and people to the area.
For example, Intel recently announced that it will be investing in a $7 billion facility in Chandler, Ariz., which is expected to create 3,000 new jobs for Intel alone, as well as create an additional 10,000 long-term jobs across the state.
Another example is the $5 billion Apple Park Campus in Cupertino, Calif. This new campus is currently under construction, but the community has already felt the positive impact and economic growth that this facility will deliver. Since construction began, the region has seen an uptick in new retail, dinning, residential units and hotels, as well as a significant increase in property values.
With many cities working to revitalize urban areas, we are seeing a sharp rise in the number of growth projects throughout the West. In addition to the Intel and Apple projects mentioned above, this also includes new developments such as the $200 million Raiders football stadium in Las Vegas, Nev., the $1.26 billion Tesla plant expansion in Fremont, Calif., the $2.6 billion Rams football stadium in Los Angeles and the $5 billion in construction in downtown Seattle, among others.
These large-scale projects are key demand drivers for light multi-tenant industrial assets and play a tremendous role in the value of these properties. As these local communities expand, they will continue to attract more and more new businesses, many of whom are seeking infill multi-tenant industrial properties in the surrounding areas. This will translate into increased demand for this product type over time, increasing long-term occupancy rates and ultimately placing upwards pressure on rental rates.
Overall, demand for multi-tenant industrial product is on the rise from both tenants and investors. As the recovery of small business continues to grow, retailers continue to improve delivery times to consumers and large-scale growth projects continue to increase in cities across the West, we will see significant increases in demand for multi-tenant industrial space, especially near population centers. From an investment perspective, as big-box space continues to receive increased competition and record pricing, investors will shift their focus to multi-tenant industrial in order to generate higher yields and capitalize on the growing tenant demand in this sector.
Brian Malliet is the CEO and co-founder of BKM Capital Partners, a fund manager and operator of a platform targeting value-add, light multi-tenant industrial real estate in the Western United States. The firm recently launched its second institutional commingled fund with a target of $300 million in equity commitments for $850 million in buying power.