SIOR Fall 2024

I attended the Fall Conference of the SIOR, (Society of Industrial and Office Brokers) of which I have been a member for about 20 years. SIOR is an 83-year-old group of 4,000+ commercial real estate brokers (Brokers) specializing in sales and leasing of office and industrial properties. Some industrial real estate developers (developers) also attend to present or promote their properties.

The Society was founded in 1941 as a result of the demand for industrial space during the war effort. The US government needed industrial space to manufacture materiel for World War II and finding suitable industrial property nationwide would play a part in the country's success. SIOR was formed as a network of the countries best commercial real estate professionals.

There is a Fall and Spring conference with about 700 brokers attending from the US and around the world to network and learn about other markets. The best part of the conference is that it gives brokers and developers a real-time view of what is happening nationwide. A chance to learn some best practices and some ideas that have not worked so well.

Below are some notes from the presentations:

One perception from the public is that 'Industrial Development is Bad'.

Developers and brokers around the country, especially in California are receiving pushback from residents who do not want more warehouse development in their neighborhood. California has passed a law (AB98), beginning in 2026 warehouse development is prohibited in some areas unless specific standards are met.

-Warehouses over 250,000 sf must be 900' from homes, schools, parks, and health care facilities, and truck loading bays are 300' from the property line. 

-An access route plan for trucks to the development must be approved. 

-If the developer demolishes an existing housing unit during construction, 2 new housing units must be replaced for each one destroyed and must provide 12 months' rent for displaced residents.

-Warehouses must comply with new energy efficiency standards. 

-These new California building restrictions are a positive for Arizona and Nevada development and industrial absorption. Even in Arizona, residents are going to city zoning meetings voicing their disapproval of planned industrial development.

The Los Angeles 'Inland Empire' area, encompasses the Ontario Airport east to  Banning, CA and south on Interstate 15 to Moreno Valley, CA.

During the COVID era, industrial land in the Inland Empire area sold for $200 per square foot (psf), and industrial buildings sold in the $400 psf range. Industrial real estate prices are declining and are in a 'price discovery' process.

Offers for large Inland Empire industrial buildings are now in the $250 psf price range.

Inland Empire industrial space has had negative absorption (more space coming on the market than is being leased) in the past few years, eight percent industrial vacancy now in an area with typically 3-4% vacancy. Landlords are offering free rent and tenant improvements to land tenants in their empty buildings. 100 million sq. ft. of Inland Empire industrial space has been built in the last two years, also, some big tenants in the Inland Empire have closed or put their warehouse space up for sublease; 

Big Lots is closing, their 1.4 million sf building on the market (Apple Valley).

99 cent store is closing and vacating a 900,000 sf building (Commerce).

UPS is subleasing a 1 million sf building (Fontana).

Reduced rental rates, like a new building expecting $2.00 psf /month NNN rental rate is now going for $1.42 psf, 71% of the expected rent. A national tenant leased a built-to-suit building but is waiting 2 years to occupy it. How these transactions pencil out with lenders expecting a higher rent is to be determined.

These stories of reduced lease rates and industrial building sale prices are common across the country, including  Arizona as we have discussed.

Other thoughts on new industrial development requiring more expense to provide what the tenant needs:

-Construct a charging station on site for an electric truck fleet.

-Can the industrial building site become a net electrical power generator with solar panels or a wind/gas turbine?

-These 'extras' take away land area from the normal function of a distribution center.

-Are tenants willing to pay the extra cost of these site benefits?

The hottest industrial developments in Phoenix and many US cities are data center facilities. So many are being built that real estate developers are running out of good sites. Three key needs for data center land are: lots of electrical power, water for cooling equipment, and communication access. The best sites in many markets have been taken, so creativity rules the day.

One solution is an abandoned coal mine in the eastern US. The site has methane/natural gas which is convertible to electrical power. The water supply is toxic, but can be used for cooling. An adjacent railroad line allows connecting to communication trunk lines.  

One developer who presented tore down a 26,000 sf industrial building near the LA/Long Beach port area and constructed a $15 million truck charging station. Diesel truck emissions in the port area are restricted, so more electric-powered semi-trucks are being used. The developer has no idea if it will be profitable, but the site is in an excellent location. 

I realize there is a lot of 'California stuff' in this letter, but these issues are showing up in Arizona too. A growing resistance to industrial development, reduced industrial building sale prices and lease rates, on-site electrical charging for delivery trucks, and the demand for data centers are all issues affecting the Phoenix real estate market.

Some ideas at the conference are cutting-edge, some of which you may see in future developments, while other ideas may not get off the ground.

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Credits 

2024 SIOR Fall Conference

SIOR