Strong demand for industrial space, investor interest in the asset class, high interest rates and economic uncertainties have left industrial owners and investors grappling with a shifting set of opportunities and challenges.
Among investors, “there is huge appetite for industrial. It is still a stable asset class. Cap rates are still higher than they were two years ago and a lot of those guys are cash buyers who are not going to put debt on a property right now,” said Matt Laraway, Executive Vice President/Partner with Chesapeake Real Estate Group. “There is definitely capital that has been waiting on the sidelines for a while that is now back and being super active. We are seeing a who’s who of industrial buyers bidding in the market and pricing is really, really solid.”
“Institutional private equity buyers are paying top dollar for Class A properties,” said Patrick Smith, Vice President of MacKenzie Commercial Real Estate Services.
Many transactions, however, are complicated.
“There is a disconnect between buyers and sellers on the value of properties,” Smith said.
Some buyers claim that prices are too high in the face of high interest rates, he said. At the same time, some sellers say prices will increase once interest rates decline, so today’s prices are actually good deals.
Some sales have been complicated by challenges with appraisals and financing. Recent sales of two industrial buildings in Towson became two of the highest comps in the submarket at $196 and $245 per square foot.
Recent sales of industrial properties in Towson have achieved near-record-high prices. Photo courtesy of MacKenzie Commercial Real Estate Services.
“We really haven’t seen much over $200 a foot previously, so you are pushing that limit,” Smith said.
That price point, however, also meant that one deal initially didn’t appraise.
To make some transactions work, buyers, sellers, lenders and brokers have developed creative financing packages.
“We have done a few seller-financed deals where they had a gap on price” between the approved mortgage and the sales price, Smith said. “The seller agreed to provide financing for two to three years and the buyer would refinance after that. We also have great relationships with a few lenders who are providing great terms for owner-occupied properties. Some of our clients have been able to get favorable terms – rates in the high fives for 15 percent down – so they can pay a little higher price.”
Changes in valuation, financing options and investor activity is also fueling discussions between owners and brokers about how to increase the value of their properties.
“One of the biggest things that I am working with owners on is maximizing the value of their rent,” said Bryan Herr, Vice President of MacKenzie Commercial Real Estate Services.
Some owners have not kept pace with recent rental increases.
“For example, in Beltsville in Prince George’s County, you can get upwards of $15 or $16 a square foot. A lot of owners might still be at $8.50 or $9” Herr said. “I am also educating owners about getting their tenants into triple net leases and getting their costs covered. A lot of them are still doing modified gross, but triple net is very acceptable to most tenants currently.”
Photo courtesy of MacKenzie Commercial Real Estate Services.
Some owners also have opportunities to improve the revenue from and value of their properties through industrial outdoor storage and parking space.
“There is a lot of industrial in the Baltimore area that has land with it and a lot of times it is underutilized,” Herr said. “I walked a property last month with a client. There was a parking lot, a building and an area of about an acre that was just overgrown grass and weeds. I said, if you cut that down and gravel it, you could get $8,000 to $10,000 a month in rent for just having trucks or heavy equipment park there.”
Sometimes, that analysis of how to optimize property value leads to the conclusion that some owners would be better off delaying sales for a few years, Herr said. “I will tell people, I can get you $150 a foot for your building as is. If you do these three or four things with the rents, I could get you $175, maybe $180 a foot. You might get $3 million more for your building.”