Twice a year I meet with my SIOR colleagues from around the world to make deals and compare markets. This was the first time we held the meeting virtually. While not the same as in-person, I was still able to connect with many of my peers and have valuable learning time.
The meeting started with Alan Mulally, former CEO of both Boeing and Ford. He shared his principles and practices that drove both companies. I did not realize how important it is to have written principles to share with customers. It will now be an ongoing practice of mine to remain accountable and establish a successful relationship.
The Industrial segment took stock of recent trends since the outbreak of COVID-19. Companies are taking 5% to 10% more space than normal to keep excess inventory for the sake of resiliency. “Just-in-Time” production failed due to supply chain disruptions and resulted in sales declines. Similarly, companies are looking at expanding the number of Distribution Centers reversing recent trends of consolidation into fewer warehouse. No one wants to be left without product.
There is an unprecedented demand for distribution space and at the same time, space shortages. Local governments, planning and building agencies are unable to respond in a timely basis. Permits for new warehouse construction are delayed because of excessive “red tape”. The result is a constraint on supply and a primary reason for strong absorption. Tenants want to secure space while it is still available.
One new development trend is the construction of multi-story distribution facilities where land prices are particularly expense, for instance in New York or Los Angeles. The designs we saw from Ware Malcomb show mostly 3-story warehouses with high ceilings and multiple loading decks to accommodate 53’ trucks on the ground floor with urban sprinter vans on secondary parking decks. Cost of these buildings are as much as 3 times single story construction but result in FARs of 110% instead of the customary 40%. One example is 640 Columbia in Brooklyn. Multi-story buildings are designed for urban infill and will meet institutional investment standards.
I participated in one session about commercial real estate pricing. The bad news is fewer transactions and price drops across all commercial property types. The MIT Center for Real Estate’s Price Dynamics Platform is a technical forecasting tool that uses current data from Real Capital Analytics. When we enter recessionary conditions, Sellers lower their prices to match reduced reserve pricing. Drops of 20% to 30% are expected, even industrial. One area where I may disagree is with new ecommerce buildings or buildings that can re-positioned because there is a pronounced shortage of modern distribution buildings.
The highlight of the Virtual Conference was the ability to hold zoom-like roundtables with up to six people. Lucky for me, I’ve been meeting with the same brokers for over thirty years, so it is easy to establish connection. It’s the personal bond that gives me firsthand insight to many different U.S. markets and the answers when clients ask about, Leaving California.