When Rooney Daschbach started working in warehouses in 1986, finding tenants was a struggle.
He advertised teaser rates of 25 cents per square foot for the South Bay Los Angeles properties he marketed, sending out rate cards featuring photos of neighborhoods. To woo tenant representatives, he and his colleagues would offer a free week-long vacation to Hawaii, even the occasional car.
In a market with a 12% vacancy rate, it would even allow tenants to rent space on a monthly basis, allowing them to pay just enough to cover warehouse owners’ operating expenses and pay their mortgage.
How times have changed.
Courtesy of Aviva Sonenreich
Izzy Sonenreich of Denver-area industrial firm Sonenreich & Co. visits a small warehouse.
bisnow spoke to brokers, developers and executives across the country with decades of experience in industrial real estate to get a sense of the difference between the industry today and when they started working in warehouses.
It starts with the money piling up in the industry: $160 billion was spent on industrial property in the Americas last year, according to CBRE, a 55% increase from 2020. globally, the industry has grown from 11% of the real estate investment market in 2016 to 22% in 2021.
The country’s warehouse stock has grown by about 75% over the past three decades, with the average size of a new warehouse being about double that of those built in the early 2000s. tenants leased 1 billion square feet, per CBRE, a record since the company began tracking the industry. Since 1989, the national average asking rent has more than doubled.
The least sexy mainstream commercial real estate asset class – by far – has become a booming sector that other real estate professionals are vying to enter.
“It was literally the end of real estate,” said Aviva Sonenreich, who runs a Denver-area industrial brokerage firm, Sonenreich & Co., with her father. “Ten years ago, we used to attend continuing education events on industrial real estate, and there were only a few people in the room. It was T-shirts and sweatpants, if anyone was around. Now it’s filled with guys in Armani suits.”
Ed Mitchell, founder and CEO of Florida-based Mitchell Property Realty Inc., said it was mind-boggling to see areas today where it is often more expensive to build warehouses than office buildings.
“I’ve heard the guys in the industry are the ones with the goats,” said Gregg Healy, executive vice president and industry group leader at Savills. “They look a little rougher around the edges. They don’t have the sense, they really clumsily find properties. But it’s totally different now.
“Look at the big business executives, Tim Cook at Apple or Mary Barra at GM,” Healy added. “They all come from supply chain positions.”
In the 1980s and 1990s, and even in the early days of e-commerce, working in industrial real estate meant slow-paced days that revolved around loyalty between tenants and landlords, a leisurely pace of leasing new buildings and experience instead of data analysis determining a new warehouse site.
When many of those interviewed for this story got involved in industrial real estate, the sector lacked the sparkle of today. They signed on for the steady pace, the unique nature of the business and the allure of the deal.
“Warehouses are one of the purest forms of real estate,” said Patrick Ryan, Chief Investment Officer of Cabot Properties. “This is not a fancy downtown office building. It’s four walls and a roof that doesn’t leak, which means the true inherent value is where they are. So by locating them, you are in tune with all the demand drivers. »
In the past, brokers representing homeowners had to pound the pavement and dig harder than they do today, according to Adam Citron, executive general manager of JLL Northeast Industrial. It was much more difficult to find a tenant.
“People thought industry just meant manufacturing or factories, and that was a hard life, so to speak,” Citron said.
If Cabot, a Boston-based industrial developer, turned over dirt and built walls on a new warehouse a decade ago and a Fortune 500 company came to ask for a lease, the company would give up everything for the sign on the spot, Ryan said. .
“The word supply chain wasn’t spoken about 15 years ago,” Daschbach said. “When I started, guys would bring inventory and it would stay, sometimes for six, 12 months. And when it comes to building warehouses, the older structures from the 80s, under 20,000 square feet, didn’t even need sprinklers.
Courtesy of Gregg Healy
Gregg Healy, Executive Vice President and Head of Savills Industrial Services Group
That pace and pressure gave way to a fiercely competitive high-tech industry that took center stage during the wild pandemic supply chain swings and the rise of e-commerce. There is no “good enough”, just scientific evaluation and explosive price growth.
Industry as a career now requires greater familiarity with technology, analysis, and the same labor and transportation calculations that potential customers make when determining where to place and store their goods. Brokers need to know all the stats for each market and submarket, Citron said, and how everything works “inside and outside of the box.”
“There are tons of spreadsheets and tabs, and customers demand it,” he said. “If you don’t, you don’t get hired.”
Industrial brokers have gone from a necessary evil to a necessary strategic partner for brands and tenants, Healy added.
“When you have a market like this, where your rates just go up vertically, your compensation doesn’t matter anymore,” he said. “They are all dated. That means you need to have someone who really understands what’s going on today. Not yesterday.
Deals are signed before projects kick off, just-in-time delivery is the norm, and developers are looking vertical and scouting potential projects in unheard-of locations, including office and shopping mall conversions. And the owners run the show.
“Let me tell you what I go through every day with this madness,” Sonenreich said. “When a property goes online in Denver, it gets five offers in an hour, unseen. Smart brokers bought it before it was even technically on the market.
Citron said price increases for available space were heading north before any proposals were even submitted, especially given the state of the market.
“The adage is ‘Why not?'” he says. “Why can’t I ask for more if the vacancy rate on the market is 1.9%?”
Now owners are asking for bids, and everything is basically a blind auction. Healy compared it to the residential housing market; companies bid on a property and suddenly Amazon, a potential dark horse until a deal is signed, comes in with better credit and cash in hand and grabs a key property .
Courtesy of Innovo Property Group/KSS Architects
2505 Bruckner, a multi-story fulfillment center in the Bronx, has been leased by Amazon and Home Depot.
“There was a time when we started getting blind offers with crazy numbers and realized they hadn’t even been in the property,” Sonenreich said. “With the influx of these mega-warehouses over the past five years, those commission checks have exploded.”
Daschbach recalls thinking that depositing a check for $10,000 made him rich, but then the monster deals got bigger and bigger. In 2006, he completed a $420 million portfolio sale and a $220 million sale for an institutional owner, the biggest year of his career. But he tended to be conservative with his earnings, having weathered enough cycles to see that you had to set aside some of that commission.
“There were guys, especially just before the 2009 recession, who had big salaries and went out and bought a big house or something,” he said. “But when the market came back down, they ended up having to sell it a few years later.”
In many ways, the market is becoming a victim of its own success. Today, new multi-storey buildings and mega-warehouses are attracting rejection from municipalities, campaigning against traffic congestion and the environmental costs of these buildings.
Ryan said Cabot now expands to sites “with hair on them” that require environmental remediation challenges or ones that were overcome just a few years ago as competition for space is relentless. The developer is now waiting until the last minute to sign a lease, because each additional week can mean an increase in rents.
“In today’s environment, you won’t even have a conversation because you don’t want to lock in a rate that’s too low,” Ryan said.
“Industrial real estate used to be this thing that nobody thought about that became something that people realize was in front of their face and they didn’t notice it,” he added. “It’s easy to understand, and it’s everywhere.”