Across most U. S. markets, the amount of available industrial space is at extremely low levels. The rise of e-commerce businesses along with a robust U.S. economy have resulted in historically low levels of vacant space. While there is new construction of industrial space in most cities, rental rates are generally expected to increase in the coming years for new and existing industrial buildings.
Rental rates are expected to increase for a few main reasons:
- Demand for space exceeds the supply of space.
- The cost of constructing new facilities is markedly higher, so any new buildings will carry a higher rental price tag.
- The cost of land is also at historically high levels due to demand from apartment and self-storage developers.
- Consolidation of industrial property ownership is resulting in landlords being bolder in pushing rental rates higher. When landlords become larger and control a higher percentage of any one market, they push rental rates higher than they otherwise would. Private equity ownership structures are also more aggressive in increasing rental rates because they are less concerned about long-term relationships with tenants given their shorter-term ownership timelines.
The increased rental costs are pressing tenants to consider alternatives. While many large corporations can typically absorb the higher rental costs, it is not quite as easy for local and regional businesses. A few ways businesses can limit their exposure to these potential rent increases are:
- Hire an experienced real estate advisor to represent your interests on a new lease or lease renewal. An advisor can shop the market for your company, create some leverage in negotiations, and negotiate the most favorable lease rates and overall lease package for your company.
- While industrial buildings charge rent on a square foot basis, occupiers use the space on a cubic foot basis. How efficiently is your company using the total quantity of cubic feet in your space? Carefully review how much cubic space you need – you might need less square footage than you occupy today!
- Consider purchasing a property instead of renting. This can be a difficult strategy to implement in tight markets with limited inventory for sale, but the financial benefits of owning versus renting can be significant in some cases. At a minimum, tenants should consider buying a building as an alternative to renting, provided they are comfortable with owning commercial property. An advisor can provide your company with additional advice regarding property ownership, the market, and financial comparisons of leasing versus buying.
- For businesses with multiple facilities in the same city, it may be possible to consolidate multiple locations under one roof thereby creating the most efficient use of the space. There might also be an opportunity to create efficiencies in one facility versus staffing multiple facilities.
The points outlined above will vary market to market - which is why it is very important to utilize the services of an experienced real estate advisor with local market knowledge to guide your company through the process to achieve the most beneficial results. Tight market conditions won’t be changing anytime soon, so if your company has a lease expiring in the next 2 years – the time to start considering your options is right now.
Article submitted by Wayne Teig, ITRA Global l Minneapolis – St. Paul
About ITRA Global
ITRA Global is one of the largest organizations dedicated to representing tenants and occupiers of commercial real estate. With experience in more than 300 markets around the world, ITRA Global consists of seasoned professionals specializing in representing tenants and buyers in the leasing, acquisition and disposition of office, industrial and retail real estate. Clients benefit by having an experienced professional as their trusted advisor, providing conflict-free representation with total objectivity.
For more information about ITRA Global, please visit the website or contact Beth Wade, ITRA Global Executive Director at +1.706.654.3202.
