NAIOP’s I.CON West: Even a Hot Market Presents Challenges

LONG BEACH, CA—Industrial real estate leaders who converged from across North America at NAIOP’s I.CON West and agreed that the market is at a high point rarely seen, but that seemingly unending demand for warehouse space creates a new set of challenges.

One of those is finding enough land to build new warehouses – large enough parcels to accommodate parking and space for containers – and properties that are close enough to accommodate the “last mile,” the short distance increasingly required for faster delivery times.

Patrick Schlehuber, executive vice president, investments, Rexford Industrial Realty, Inc., said that this means searching for industrial space raises the same question as in a search for retail space: How close is the site to the greatest number of homes?

The challenge of finding enough warehouse space near consumers brings up the prospect of multistory industrial properties, a concept that Schlehuber said generates interest – and increases costs.

“We look at multistory periodically,” he said, adding that high rents for traditional single-story warehouses have left the costs and risks of multistory too high.

With a lack of suitable land, many developers and investors are looking at retrofitting existing space into multistory warehouse facilities. That can present challenges for parking, valuation and deciding whether to demolish or renovate existing structures that may be on the property.

Once land is identified and designs are drawn, developers then begin addressing the concerns of community members who may be against warehouse developments in their neighborhood.

Aric Evatt, president, Urban Crossroads, Inc., said that communicating effectively with community leaders is a top priority.

“What we’re seeing consistently is that the typical statement [jobs and tax revenues] is not getting traction. There is a desire and direction to find more impactful ways to bring together community and demonstrate benefits in addition to the jobs and development impact,” said Jeremy Krout, AICP, president/CEO of EPD Solutions, Inc.

Scott Ochoa, city manager, City of Ontario Economic Development, had some advice for industrial real estate developers: go all in with the community.

“If you’re going to develop a relationship with the [town’s] staff, don’t ignore the council (or elected leaders). If you’re going to have a relationship with the council, don’t ignore staff. And if you’re going to have a relationship with council and staff, don’t ignore the community,” he said.

“Getting projects approved is extremely challenging. Today we don’t have to worry about leasing the space; the biggest challenge is getting projects approved,” said James Camp, senior managing director, Rockefeller Group.

Winning over communities also requires a communications effort, the panel agreed. Compared to the perception of warehouse workers formed decades ago, today’s warehouse jobs are higher-paying and require more advanced skills to manage the increasing levels of automation.

Still another side effect of the raging industrial market is that it might be leaving smaller tenants with limited options. Schlehuber said that when people think of warehouse space, they think of Amazon, but the reality is a universe of smaller manufacturers who need their goods delivered. Some sectors, such as e-commerce, are hot, while others, such as restaurant supply, are struggling.

Some tenants have found creative solutions during the pandemic, for example, by converting their liquor manufacture processes to produce hand sanitizer instead, emerging stronger. And retailers including Amazon and Walmart are launching white-label distribution services that may help smaller companies.

I.CON speakers agreed that overall levels of higher demand than supply in the industrial sector will likely continue.

“It feels like this market is going so fast that if you don’t get in now, you might not get a chance in two months. If you believe that e-commerce is going to slow down, maybe this isn’t the market for you,” said Bob Andrews, senior vice president, regional manager, CenterPoint Properties.