There is value to be had in many Western-based industrial markets — as long as you’ve done your homework and can identify that unique value for investors.
Users of light multi-ten - ant industrial properties in the Western region continued to be largely underserved in 2019. This is because most new industrial development was geared toward large warehouse and distribution facilities. Meanwhile, there remains a growing demand for light multi-tenant industrial space. This demand is largely driven by smaller last-mile distribution facilities for ecommerce, manufacturing, technology and biotechnology users.
One of the reasons new development is so focused on larger industrial facilities is that the cost to build a light multi-tenant industrial property is simply too expensive in today’s climate. This has resulted in a lack of supply — and much of what exists in the light multi-tenant industrial space is often obsolete for today’s tenants. Buyers need a proven strategy in order to be successful in this category.
BKM’s strategic approach is to acquire light multi-tenant industrial properties in growth markets that are in need of renovations. For example, we recently purchased Crossroads Distribution Center in Denver, a 14- unit industrial asset containing three single-story distribution warehouse buildings that total 150,245 square feet. The acquisition represented a rare opportunity to acquire a well-occupied industrial business park situated in one of the most desirable and fastest-growing industrial submarkets in Denver. The property will undergo $1.2 million in capital improvements, which will include upgrades to the roof, HVAC system and parking lot, as well as a rebranding as Havana 37 Business Center.
Crossroads Distribution Center is a 14-unit industrial asset in Denver that contains three single-story distribution warehouse buildings totaling 150,245 square feet.
Know Your Market, Your Competitors, Your Challenges
BKM’s focus has been to successfully source properties below replacement cost where there is a strong opportunity for value creation. However, one of the biggest challenges we faced this year was an increase in competitive interest. While light industrial is becoming en vogue, this field is still narrow and, so far, we have been able to execute significantly below replacement costs. We expect growth in this space to continue, particularly with demand ramping up for same-day delivery, which requires infill facilities congruent with this type of product.
Sourcing deals has also been a challenge since many industrial properties have been rezoned for other uses, such as multifamily. The inventory of assets available for purchase for industrial use decreased again in 2019, making it necessary to rely on untraditional methods to find properties for sale. Maintaining strong relationships within the industry can lead you to many off-market deals.
Though challenges remain with competition and lack of available inventory, industrial, as a whole, is such a strong property sector that we don’t anticipate much of a slowdown. Industrial vacancy is near 0 percent, or at least in the single digits in a large number of major Western markets. Meanwhile, rental rates and sale prices continue to rise, which speaks to the sector’s robust nature.
Properties of all types are almost always in high demand in most Western regions, particularly the coastal markets. Industrial remains at the top of the list in terms of desirability, and it shows no signs of weakening. Experts are predicting a mild recession at worst, and real estate won’t be the cause, so we don’t expect to see a major negative outcome in any Western market where we conduct business.
If there were a slowdown, the market could potentially cool to the point where there were more sellers in the market, which could serve to increase deal volume in a category with great pent-up demand. That said, we believe light multi-tenant industrial is a category with great stability even in slow economic times.
Provide Something Unique
The focus on tenant experience has expanded from office to multifamily and, now, to industrial. This will continue to be an important aspect of owning and managing commercial properties. It’s no longer acceptable to simply provide space for tenants to live or do business — that space must offer them a positive experience, or they will soon move on. This is why you are seeing many office- and hospitality-like amenities making their way to the industrial sector. Property owners realize these amenities are in high demand, and tenants have come to expect them in all aspects of their lives.
For example, we unveiled creative improvements last year at Backlot Burbank, a 12-building, 302,869 square foot industrial business park in Burbank, Calif. These improvements included adding original urban street art murals painted by Rome-based artist Alice Pasquini. The murals were installed to reflect the creative tenants’ emotional connection to the active entertainment core for broadcasting and radio production in which the property is located.
Across our portfolio, we recognize the tremendous opportunity in delivering unique upgrades that celebrate culture, art and the local community, as well as the way these enhancements drive value for our investors.
Backlot Burbank is a 12-building, 302,869-square-foot industrial business park in Burbank, Calif., that underwent improvements last year. These improvements included adding original urban street art murals to the space.