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Tight Industrial Supply Turns Subleases Profitable

Some dynamics of logistical and industrial space leasing are feeling pressures of inadequate supply, according to a panel of NAI Global industrial and logistics real estate experts meeting virtually.

Although demand pacing ahead of supply had become expected by partway through the pandemic — industrial with multifamily being the two darling property types for owners and investors — many markets have become weaker. A recent Cushman & Wakefield study found that industrial had shown signs of slowing down in the fourth quarter of 2022. Only five of 81 tracked markets posted double-digit quarterly increases, although some bright spots such as Charleston, Inland Empire, Phoenix, and Miami all recorded annual gains of 40% or higher. Coastal and port/population-proximate markets continued to see premium pricing.

The information coming out of the NAI panel may have represented some specific experiences and not broader and statistically representative findings. But one panelist managing subleasing assignments in multiple markets said that one corporate client on three different occasions was able to raise rates on sublease occupiers. The primary occupant is splitting the increased rent profit with the landlord equally.

“The same thing is happening in another market covered by NAI Global, with the meeting participant saying that he had put a client in a building 18 months ago on a 7-year lease at $7.65 NNN,” the report said. “They experienced rapid growth during those 18 months and subsequently expanded into a larger facility resulting in them placing their original space on the market for sublet at $8.95 NNN. Currently, there are two companies competitively bidding on this sublet space who are willing to take it ‘as is’ and at the asking rental rate.”

More evidence of a lack of supply is in rental increases.

“In Virginia, one of the NAI Global brokers reported a renewal in which the previous rental rate went from $7 a foot to $10 per-square-foot (PSF),” said the report. “The broker said they surveyed the market for relocation options but in the end, there were no viable options and the renewal deal was struck.”

Similarly, a client in New Jersey has been paying $6.50 a square foot but renewed at $14, “simply because the landlord knew the tenant’s choices for relocation were limited, and demand in the region is so high.”

And in Laredo, Texas, which is relatively close to big manufacturing plants in Monterrey, Mexico, the vacancy rate is effectively zero, with all new inventory being delivered in the first quarter expected to by immediately absorbed.

“In fact, the broker said that all 2.8 million square feet scheduled for delivery this year will be absorbed before the buildings are completed,” said the document. Laredo reportedly has an industrial base of about 40 million square feet.

 

Source: GlobeSt

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