Industrial-Strength Leasing

Perhaps more than in any other asset category, a widespread lack of choice is limiting the ability of industrial occupants to relocate, rather than renew. A look at industrial tenant renewal decisions.

Perhaps more than in any other asset category, a widespread lack of choice is limiting the ability of industrial occupants to relocate, rather than renew. Markets nationwide continue to tighten. During the first quarter, vacancy declined to 7.4 percent, 80 basis points lower than during the first quarter of 2013, and prices have inched up from $5.73 to $6.03 per square foot, Cushman & Wakefield Inc. estimates. Absorption hit 30.5 million square feet during the first quarter, a 21 percent increase compared to the same time a year ago.

Besides boosting prices, dwindling options for tenants are curtailing leasing activity. Only 11 of 37 markets tracked by Cushman & Wakefield recorded an uptick in leasing activity during the first quarter. Metropolitan Los Angeles took the top spot with 7.7 million square feet, yet that robust-sounding total was still off 16 percent from the first quarter of 2013. Industrial owner/investors are hustling to fill the gap. During 2013, the industrial construction pipeline in 37 major markets doubled year over year to 80 million square feet, according to Cushman & Wakefield.

Also at issue in industrial tenants’ renewal decisions is the growing divide between facilities used primarily for storage and pickup and more sophisticated facilities that employ automation to sort and ship items. “In a high-cost environment, those two (functions) might be split up” between separate facilities rather than combined, explained John Morris, Cushman & Wakefield’s industrial service lead for the United States. He cited New Jersey, San Jose and Miami as examples of those more expensive markets.

“More and more, for Class A space, we are seeing clients willing to sign on for a longer term when they feel they’re making the best decision for their capital investment,” Morris added. Those tenants will trade a longer term for a discounted price.

Insights into better tenant retention in today’s market, including more details on the office leasing market, appear in “To Stay or To Go?” in the June 2014 issue of Commercial Property Executive.