Industrial

Industrial Evolution

Modern Warehouse and Manufacturing Needs Drive Today’s Industrial Park Development.

Industrial parks are the destination of choice for industrial property tenants and investors alike. The benefits of being located in or investing in a master-planned park now outweigh those of stand-alone sites for many. "Our preference is always to go into an industrial park," says J. Thomas Mercer, a vice president at Denver-based ProLogis Trust, the nation’s largest industrial real estate investment trust. "They have all the access [and] the amenities necessary for our customers to operate."

Many parts of the country are witness to increased activity in this segment. "They’re definitely in a growth stage," says Lane A. Holbert, CCIM, a senior industrial specialist with Grubb & Ellis Bissell Patrick in Charlotte, N.C. "We’ve had more and more competition come into the Charlotte market."

"Nationwide, everybody goes to them," Mercer adds. "I can take you to any city in America and show you a recent industrial park."

Industrial Inclination
Industrial parks have continued to evolve since the early parks were developed in the 1950s, says Jack Fraker, senior director of Cushman & Wakefield in Dallas. "Over time, increasing attention has been paid to covenants, codes, and restrictions designed to ensure compatible developments within the park," he says. These legal documents, known as CCRs, are typical in master-planned communities such as industrial parks and are enforceable by local park governance. They regulate issues such as quality of construction, construction materials, uniform setbacks of buildings from streets, degree of landscaping, and outdoor storage.

In addition, "The cost of bringing in infrastructure, sewer, [and] water to one site, vs. bringing it into a park where you can maximize it for everybody, can be prohibitive," says Michael Baxter, CCIM, president of Michael Baxter and Associates in Tannersville, Pa., who recently was marketing a new industrial park in northeast Pennsylvania. "It also becomes an economic development destination. There’s going to be businesses that feed off of other businesses."

Mercer relates a recent deal he did in the Denver area, in which Rocky Mountain Bottle chose a 227,500-sf property in Coors Technology Center, a business park with an industrial component in Golden, Colo., over a stand-alone building in Denver that was near residential properties and a school. "You had such a hodgepodge of users, we didn’t know what would be there in the future," Mercer says.

In addition, "We’re seeing increasing use of industrial parks as a place where various functions and business units are combined in a single building," Fraker says, with office, service, and warehouse functions in one place. This means that upward of 25 percent of the building may be used for general office space.

Industrial parks tend to have tenants that "congregate by the intensity of their use," Mercer says. Distribution and light manufacturing are typical uses. But sometimes industrial park tenants are industrial "in quotes," says Mike Carr Sr., CCIM, SIOR, senior vice president and manager of the commercial division of Coldwell Banker Commercial McFadden & Sprowls in Naples, Fla. In other words, they’re not really industry at all, but rather operations such as back offices or call centers (See "Call Now," CIRE, January/February 1999.)

Overall, "They’re going gangbusters," Mercer says. "We’ve signed almost six million feet of build-to-suit [in 1998]. I keep on hearing that there’s a wall at the end of this tunnel. We just haven’t gotten there."

Concern about just what influence the ongoing economic troubles in Asia could have on the U.S. industrial sector will continue. However, some observers aren’t predicting large-scale fallout. "I think that the Asian crisis, while it’s still going to have an impact," will not be as big as expected, says Tim Rolston, a vice president with Colliers International in Oakland, Calif. World economic issues will affect development, Mercer agrees, "But whatever development there is in the future will prefer to be in a park."

On the financing side, in the 1980s, fees such as those for loans and development drove the market, Rolston says. "Nowadays, you have equity investment. People are putting their own money into deals so they’re taking a closer look." Moreover, "In the 1980s, you had lots of money chasing development," he adds. "Up until recently, we had lots of money chasing deals. Now with the capital markets tightening up back in August, that’s really put the brakes on a lot of deals. I think it’s a blip — I think it’s going to open up again in 1999."

Securitization has had a significant effect on the segment as well. "Obviously, one of the biggest impacts from the landlords’ side is the securitization of real estate through the REITs," Rolston says. "People say REITs may only control a smaller percentage. From a business park standpoint, a lot of that property has changed into the REITs’ hands."

Bigger, Stronger, Taller
Commercial real estate professionals need to understand the characteristics of today’s industrial park properties. Brad Kornegay, senior marketing director for the industrial division of Trammell Crow in Memphis, sums up the main physical trends in industrial park properties this way: "bigger, stronger, taller."

Innovations in material handling equipment have prompted the evolution of modern warehouse buildings and thus industrial park infrastructure and design, Fraker says. Innovations include bigger forklifts, narrow-aisle racking equipment, and longer tractor-trailers that can be more than 70-feet long including the cab, he says. "The user needs much more room to maneuver at these warehouses, which means that the industrial park design has to accommodate the truck apron [where trucks back or pull in] at least 120 feet deep."

Several other trends in industrial park properties’ physical characteristics have emerged.

Clear Height. The clear height — or how high product can be racked — of industrial park buildings is getting higher, Holbert says. "The standard in Charlotte is 24-foot clear. Some developers are building 30. Some markets are going higher. With the racking and forklift systems available today, tenants want more bang for their buck, he says. "It’s cheaper to go vertical."

The increased heights mean higher costs for racking equipment and forklifts that go high enough, Kornegay says. Workers also need training on new equipment. "To unload two pallets from the top shelf — one slip and that pallet’s fallen 28 feet," he says.

In addition, in locations where earthquakes could be an issue, such as Kornegay’s market along the New Madrid Fault, high-stacked product must be properly braced, he says.

Truck Docks. The number of docks for trucks also has increased, brokers say, and many industrial park properties have gone to cross-docking, or putting truck doors on multiple sides of a building.

"We’re trying to put as many truck doors as possible" in Memphis, Kornegay says. Memphis has been the beneficiary of industry consolidations in which several distribution centers have been condensed to one large center in his market, he notes. "You’re shipping the same amount of product and running the same amount of trucks. If you don’t have those [additional] doors, you’ve got a problem."

Further, manufacturers’ continued use of "just-in-time delivery" means product often spends more time in truck trailers than sitting in warehouses, which requires more trucks and trailer storage, Holbert says.

While the number of docks desired varies, one customer of Holbert’s from Dallas wanted one door per 2,500 sf of warehouse space, "which is very high," he says. "That’s why you have to go to the cross-dock scenario."

Door design also has expanded, moving to 10-by-10-foot doors instead of 9-by-10 feet or 8-by-8 feet to accommodate oversized freight, Holbert says.

"You also see more developers installing pit-type levelers," he notes. Instead of a forklift operator dragging a plate to bridge a gap, levelers are built in and automatically engage, making a smoother transition. "It’s not new, but it’s a trend that more and more developers are putting those in upfront," he says.

Fire Safety Systems. Properties also are implementing "early suppression, fast response" systems — "the latest and greatest in sprinkler systems," Kornegay says. The ESFR systems are designed to actually put out a fire, whereas many systems just try to maintain conditions until firefighters arrive.

Landscaping. Industrial doesn’t usually bring to mind the most beautiful properties. However, if industrial buildings are well landscaped and have more windows, "those employees are happier," Holbert says. "Then there’s still the old segment of the market: They don’t care what the building looks like."

Some parks use mandated features to employees’ advantage, he says. For instance, a storm retention pond required by municipalities may become a permanent pond with park benches and picnic tables "so employees can go out and enjoy that space," he says.

Market Variations
Industrial park opportunities play out differently depending on the market settings. Here’s a sampling of what’s happening in urban, limited-growth, and rural markets.

Urban. "We are definitely in a growth mode," Kornegay says of his Memphis market, which "for the past three to four years has been phenomenal" creating lots of opportunities for industrial brokers.

The growth in Memphis is attributable to companies relocating several distribution centers into one large — usually 300,000-plus-sf — location for cost savings. Memphis is an attractive hub, he says, because roughly 60 percent of the country is reachable overnight via truck and the remainder can be reached in two days, not to mention the impact of the city’s Federal Express and UPS hubs. Access to air, road, water, and rail transportation and the low cost of labor and living also are factors, he says.

Memphis’ overall industrial market has about 120 million sf of space, he says, with investor-grade product running about 60 million sf. The area’s southeast submarket has about 72 percent of that space and a midyear vacancy of 8.6 percent. Recently, about 4 million to 5 million sf of new space has been built per year, most of which is product 300,000 sf and above. Memphis’ big-box space leases for about $2.65 psf double net annually, with smaller space going for $3.15 psf to $3.50 psf. Large properties sell for $30 psf to $33 psf and smaller properties for $33 psf to $36 psf.

Limited-Growth. In contrast, "We have one of the most interesting industrial areas in the country," says Carr, whose Naples, Fla., market mainly is an affluent retirement community on the state’s southwest coast.

Local leaders decided 12 years ago to prevent heavy industry from making its home there; Now, the railroad tracks stop at the county line. "Because of that, we have limited industrial and — we are not going to zone any more. We’re probably going to run out in the next 10 years," says Carr, who represents two industrial parks under construction, which are 150 acres and 40 acres.

Industrial property in Naples is so expensive it doesn’t sell often, Carr says. Land runs $4 psf to $5 psf, he says. Lease rates are about $4 psf net annually for plain metal buildings, $5 psf net for "better" buildings, and $8 psf to $9 psf for improved areas. Local industrial vacancy is less than 5 percent. Not surprisingly, Carr also finds industrial opportunity in other, more industry-friendly areas.

Rural. Though many might think of large metropolitan areas as the main home to industrial parks, "There are industrial parks in rural America, many of which have been developed and/or [are] owned by local economic development organizations," says Joe Varacallo, CCIM, vice president/owner of Developac in DuBois, Pa.

In such areas, he says, brokers can take the role of facilitator between private enterprise and local government to create a joint venture for an industrial park development and apply for grants and low-interest loans.

Varacallo, who worked on a joint venture with his local municipality, received a phase one grant of about $690,000 for a 45-acre development that is more than half-sold. "The first phase was so successful," they applied for and — after getting turned down twice — received a $790,000 grant for phase two of the project. Still, such development must be put into perspective. "We do not have a strong absorption rate where this space will be maxed out," he says. "It will take 15 years to fill space. One has to understand and be interested in the long haul."

Investor Attraction
Industrial park properties will continue to be attractive to investors, brokers say. An investor looking at an industrial park gets predictability and protection, Mercer says. "That’s a big thing. If you’re buying a building, you’ve got to figure out what’s going to happen 20 years out."

Most institutional investors and tenants in the parks realize that CCRs "are designed to protect the investments and govern overall quality in the park," Fraker says. CCRs are especially important with industrial real estate, he says. "As a product type, there’s a pretty wide range of the type of quality. The extreme could go all the way from a metal warehouse with outdoor storage to a magnificent painted tilt or precast panel wall construction that looks more like an office building."

Industrial park property yields range from 9 percent to 12 percent, Mercer says. "I think an investor will pay a premium to be in a park so he’ll take a lower yield." Later, the investor can sell for a higher price, he says.

"Moving forward, it will be the preferred location for users and ... for builders and developers," Mercer says, "especially with high-quality companies and larger companies who understand the impact that a poorly located facility can have on their operations."

Broker Know-How
Commercial real estate brokers who want to do sales, leasing, site selection, or other work with industrial park properties have several options. To do business — as with any property segment — brokers must be knowledgeable about the particulars of the industrial world.

"You have to know what’s available," Carr says. "You have to be a specialist. You have to know your product type so you know what the inventory is. We do gross leases rather than net leases frequently. You have to know the size of overhead doors. It’s just like any other specialty in commercial real estate."

Brokers also must be up to speed on the types of prohibitions or restrictions within a park, Fraker says. For instance, businesses that cause extreme odor or litter, such as hog rendering or glue companies may be prohibited from the modern parks. "If the broker’s representing a glue company, he should check out park restrictions," Fraker says. "Or, if he’s representing a developer that only builds metal buildings, he should see if that type of construction is restricted in the park."

Some brokers say a full-time commitment to industrial properties is the best tactic. "I see a need for real estate brokers that make a 100 percent commitment to marketing those types of properties," Baxter says.

"I think that the real opportunity for brokers exists in the services provided for build-to-suit opportunities," says Steve Blake, CCIM, vice president of the office and industrial division of CB Richard Ellis-Buffalo in New York.

Brokers doing site selection for an industrial park property or development must consider basic factors including tandem-trailer access, turnaround space, road access, and road infrastructure, Blake says.

"The most important thing would be access" to transportation and relevant businesses, Mercer agrees. Proximity to highways and airports is critical and nearness to other businesses, such as suppliers and users, as well as amenities that support the park, such as hotels and restaurants, also is important, he says. In addition, it’s critical to note buffers between the property and any nearby residential property. Natural barriers such as a mountain, hill, park, or a major street are preferred, he says.

Traffic congestion can be a big issue, notes Pat Henry, a managing director at Trammell Crow in Atlanta. "When you’re talking about parks, you want to build close to where people live and you’ve got the different support elements around you," he says. However, in his case, "the basic infrastructure has grown so fast in Atlanta that we’ve outpaced our infrastructure."

In addition, brokers must understand zoning to work the raw land side of industrial parks, Holbert says. They also should be able to read topographical maps to know whether or not to pursue a site for a listing.

In Holbert’s Charlotte market, the majority of good sites are gone, he explains. "So, you’re dealing with tougher pieces of land: topography, configuration, more zoning hurdles. If you know a little bit about all of those, you can present to the prospective buyers some alternatives."

Barbara Stevenson

Carol C. Honigberg, JD, is a partner in the real estate group at Reed, Smith, Hazel, & Thomas LLP in Falls Church, Va. Contact her at (703) 641-4220 or [email protected] Steven M. Nolan, JD, is a member of the firm\'s environmental group. Contact him at (412) 288-4158 or [email protected]

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