Leasing Market on Fire!!!!!!

U.S. industrial property is so in demand that real estate developers and brokers say it’s often best to leave a building vacant and hold out on signing a lease because rents are skyrocketing so much and so fast.

“What’s fundamentally changed is actually now vacancy is not necessarily a bad thing,” said Jason Tolliver, executive managing director of logistics and industrial services for Cushman & Wakefield.

That was one of the takeaways from several panels on Thursday at NAIOP I.CON East, the nation’s largest gathering of industrial real estate professionals. The conference is being held this week in Jersey City, New Jersey, after an 18-month hiatus because of the pandemic.

The event, which continues on Friday, has drawn over 1,000 attendees, NAIOP President and CEO Thomas Bisacquino said. The trade group delayed the conference from its usual date in May, according to Bisacquino, who said the group had been concerned about the potential turnout. But it exceeded expectations, topping 2019’s attendance of about 900 people.

The brokers, landlords and other real estate professionals involved in the logistics market had good reason to gather, trade war stories and even celebrate: The industrial sector keeps busting records in terms of low vacancy rates and rising rents, driven by e-commerce’s need for space.

During Thursday’s panels, there was also discussion about the headwinds the logistics market faces, such as the impact of supply-chain bottlenecks, the soaring costs of building materials and land, and the impact of rising inflation. But despite those challenges, the consensus was that demand in the sector still wasn’t going to cool down anytime soon.

The industrial market in North Jersey has been particularly strong, with record-low vacancy rates. These properties are in Bridgewater. (Cushman & Wakefield)
The topic of vacancies came up at several of the sessions, with panelists saying something that seems counterintuitive: For speculative properties, built without having a tenant lined up, it makes sense in today’s market to wait until the last possible moment for a landlord to get a lease signed, to have a building remain “unencumbered” by an agreement. In fact, they said a vacant logistics building in some cases may be more valuable than one leased at below-market rates.

Landlords Shun Long Leases
Any landlords or developers signing leases with tenants for distribution centers that are under construction and won’t be completed until a year later, for example, may miss out on charging the sometimes double-digit increases in rents that have occurred during that time, according to brokers. With demand in some industrial markets so strong, sometimes exceeding supply, a landlord can wait to close a deal without much risk, according to several panelists.

“A vacant building today in most markets is better than a leased building,” said Peter Schultz, executive vice president at First Industrial Realty Trust.

With industrial rents rising as much as 20% in a quarter in some markets, and some vacancy rates at 2%, some feel it’s best not to lock down a tenant too early, according to John Morris, CBRE’s Americas leader for industrial, logistics and retail.

That’s led some landlords to say, “I’m just going to wait until I’ve painted [the newly built warehouse], and I’ll take calls” then from prospective tenants, Morris said, sometimes waiting until just three to five months out on a project’s completion.

“I think that’s pretty new in some of the bigger markets,” Morris said.

Echoing the CBRE executive’s comments, Nick Pell, president and chief investment officer for Link Logistics, the industrial real estate arm of investment giant Blackstone Group, said when it comes to preleasing, it pays to wait things out every month.

Speculative industrial projects used to raise concerns from investors about their low occupancy, according to both Schultz and Devin Barnwell, senior vice president and global head of portfolio management for logistics real estate at Brookfield Asset Management.

Investment Surge
Now, investors are clamoring for more speculative development, and Schultz said his real estate investment trust has almost doubled down on that kind of investment across the country.

“We’ve really put our foot down on the pedal,” he said.

The demand for Class A industrial properties in North Jersey is so strong that the vacancy rate is 1% or less, according to Jeffrey Milanaik, a partner for the Northeast region of Bridge Development. In that kind of environment, coupled with rising rents, he lamented a lease he did with a tenant for one of his big projects.

“I made a huge mistake,” Milanaik said. “I signed a 10-year lease.”

Other panelists are choosing not to enter into long-term leases so they don’t miss out on big rent increases a market may be seeing during the term of those agreements.

“In some markets, we’re not going to sign long-term leases,” Schultz said.

Milanaik is a long-term veteran of the industrial market who has marveled at the explosion in demand it’s seen.

“Personally, I had to wait about 28 years for it to happen. … Fast forward to today, the market is on fire,” he said.

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