| T |
he struggling economy battered the industrial real estate market over the past year and created opportunities for companies working to re-configure their supply chains. Many companies are taking advantage of these opportunities in the hopes of stealing a march on their competitors once the economy regains its balance.
Despite a number of notable corporate supply chain projects, the industrial real estate market remained weak through the first quarter of 2003, with vacancies inching over 10 percent nationwide and rents reaching a five-year low. Grubb & Ellis and other industry observers now predict that the market may not return to equilibrium until next year or even 2005.
Meanwhile, corporations with available resources have been taking strategic advantage of opportunities offered by high vacancy rates, low rents and the low cost of capital.
General Motors Corp. (GM), for example, has been pursuing a supply-chain reconfiguration throughout the recession. The automaker’s current goal is to speed the delivery of parts to local dealerships. To that end, the company executed a major sale-leaseback transaction with First Industrial Realty Trust Inc. of Chicago in July 2002. Totaling 1.9 million sq. ft. (176,510 sq. m.), the four-building transaction raised $48 million. GM is using the cash to fund the development of a network of small high-throughput parts distribution facilities located near its dealers across the country.
When Maytag acquired Amana Appliances in 2001, the transaction created a number of supply-chain redundancies. Undeterred by the widening recession, Maytag has therefore set about a supply-chain reconfiguration designed to eliminate redundancies, reduce costs and improve efficiencies.
The East Coast component of the reconfiguration plan aimed to dispose of a 230,000-sq.-ft. (21.367-sq.-m.) facility in central Pennsylvania, to acquire a new and larger built-to-suit facility in a better location in north-central Pennsylvania, and to find a large facility in Atlanta.
First Industrial helped execute the plan by assuming the lease on Maytag’s central Pennsylvania property and leasing an existing 527,000-sq.-ft. (48,958-sq.-m.) warehouse in Atlanta to the appliance manufacturer. As a replacement for the Pennsylvania facility, First Industrial found a Keystone Opportunity Zone site near Scranton. Capable of accommodating a 390,000-sq.-ft. build-to-suit distribution center, the site also eliminates real estate taxes, franchise taxes, state taxes, and employee payroll taxes, according to Michael Brennan, president and CEO of First Industrial. “The tax advantages lowered Maytag’s real estate costs by close to 30 percent, compared to a new building (in a conventional location),” says Brennan.
Ryder System Inc., a logistics service provider, is also using the economic downturn to prepare for an upturn. In February, First Industrial agreed to become one of Ryder’s preferred providers of distribution centers. The non-exclusive agreement, the first of its kind in the U.S., allows Ryder to offer its customers real estate flexibility throughout the First Industrial portfolio in the U.S. market. “Our customers are increasingly demanding greater flexibility in all aspects of their supply-chain cost structures to allow them to more quickly respond to dynamic changes in their business and supply chain operations,” says Anthony G. Tegnelia, Ryder’s executive vice president of U.S.
Flexible features of the agreement will provide Ryder and its customers with the ability to modify distribution networks quickly and easily through early lease termination rights, relocation rights, and flex-up/flex-down options.
General Motors, Maytag and Ryder have all approached these recent distribution decisions with an eye focused more on logistical opportunities created by the recession than on recession-driven cost cutting. They are not alone.
“With few exceptions, our industrial people report an up-tick in inquiries,” says James Dieter, national director of the U.S. Industrial Group for the Insignia/ESG brokerage. “Don’t misunderstand, the market remains soft. Absorption and demand are still low. But it isn’t dead out there. A lot of companies wanted to expand over the past year — they didn’t because of the uncertainty of world affairs. But as conditions have stabilized, pent-up demand is beginning to react.”
Industrial real estate owners agree. “The market is beginning to move,” says Robert M. Chapman, executive vice president of Indianapolis-based Duke Realty Corp. “A year ago, many companies were on hold. There was uncertainty about the economy and the assurance that rents would go lower. Today, we’re telling corporations that we’re at the bottom. We don’t know when rents will begin to rise again, but they have stopped falling.”
An important component of current industrial real estate activity is build-to-suit projects. Jerry Moore, managing director of The Garibaldi Group, a brokerage based in Chatham, N.J., has noticed an increase in build-to-suit activity. “Despite significant vacancy rates throughout the country, we’ve seen a large percentage of build-to-suit requirements in the market,” Moore says.
The preference for build-to-suit warehouses over low-priced vacant space arises from strategic planning, continues Moore. At the top of the last cycle, corporations needed distribution space quickly and had no time to plan deals around strategic considerations. The recession has provided the luxury of time for planning as well as more flexible terms.
W. W. Grainger, for example, will be moving only a few miles south from its current warehouse at the 8A exit of the New Jersey Turnpike. The new facility, located in the Northeast Business Park at exit 7A, will provide 436,000 sq. ft. (40,504 sq. m.), or nearly twice as much space as the old warehouse. Developed by Matrix Development Group of Cranbury, N.J., Grainger’s new space will include a 239,000-sq.-ft (22,203-sq.-m.) component for expansion.
Rockefeller Group Development Corporation of New York is handling a build-to-suit for Crate and Barrel, which will be located at Exit 8A. The 675,000-sq.-ft. (62,708-sq.-m.) facility will consist of two buildings: a 300,000-sq.ft. (27,870-sq.-m.) furniture distribution building and a 375,000-sq-ft. (34,838-sq.-m.) housewares distribution building. The deal includes an option for a 275,000-sq.-ft. (25,548-sq.-m.) expansion.
Build-to-suit activity is surging across the country. According to Chuck Belden, senior director in the Ontario, Calif., offices of Cushman & Wakefield, build-to-suit facilities have recently grown from the normal 15- to 20-percent range to 30 percent of the transaction mix.
Why hasn’t the recession and slow recovery shut down all this supply chain? “Companies today are taking a longer view of logistics operations,” says Belden. “Logistics is no longer viewed as a cost factor. Today, it is a profit center.”
First Industrial’s Brennan agrees, and suggests the supply chain has only just begun to affect the industrial real estate market. According to Brennan, supply-chain reconfiguration will ultimately require trillions of dollars invested over 20 years.
“The theory of logistics has been around for 30 years,” continues Brennan. “Corporations now understand what they need to do. Getting it done will take money, the development of new technologies, and time. Corporations began this work in the late 1990s, but there is a long way to go.”
