The general consensus seems to be that 2013 will be a year with increased investment in commercial real estate and a return to normalcy in the commercial real estate markets. Multi-family was a popular product type in 2012 and was very helpful in driving recovery. Multi-family is sure to continue to be a favored property type in 2013, but office and industrial properties are expected to be attractive asset classes as well. However, unlike multi-family and office, industrial properties are more likely to have environmental liabilities that need to be identified and managed appropriately.
Demand for warehouse space is hot in many areas of the West Coast, including in Seattle, Denver, and Los Angeles, as well as in places like Houston and Philadelphia. These locations are particularly attractive due to their strategic location near transportation hubs and terminals. Although there are some positive signs for retail space, continued growth is expected for eCommerce, and the requirement for more distribution facilities in strategic locations has many investors taking note. Modern distribution facilities will be needed to accommodate growing demands for the storage and shipment of goods bought and sold from online market places.
Unlike multi-family, which primarily encounter issues associated with suspect asbestos-containing materials, lead-based paint, radon, or perhaps off-site releases, industrial property types are more likely to have significant environmental challenges due to a history of tenant use. These uses can include the use of underground storage tanks (USTs) related to vehicle fleet fueling and the generation of hazardous wastes in association with manufacturing, among others. Managing environmental risk is an important consideration for investors looking at opportunities in industrial property in 2013.
Although the demand is for new high tech distribution facilities capable of handling modern transportation and distribution requirements, it is common for newer distribution facilities to be constructed on sites with a history of industrial use. Understanding the historical use of the property with respect to environmental risk is accomplished through a Phase I Environmental Site Assessment, which identifies historical tenant operations and includes a review of regulatory agency records to further assess former operations and identify potential issues.
The most common cause for concern on industrial properties, especially former or current distribution facilities, is the potential for USTs. Oftentimes, USTs will be used to fuel fleet vehicles associated with the shipment of goods. Whether historical or current USTs, a Phase I ESA will document whether historical USTs were removed and whether sufficient soil and/or groundwater sampling was conducted to adequately characterize the potential for a release. Or in the case of existing USTs, whether the age, construction, and/or methods of leak detection are adequate to mitigate the potential risks of bulk petroleum product storage.
Another consideration with industrial properties is the presence of Environmental Liens or Activity and Use Limitations (AULs). Oftentimes, industrial properties will be sold with an environmental encumbrance [engineering controls (ECs) or institutional controls (ICs)] which can limit the use of the property and also include continuing obligations for a property owner. For example, an industrial property may have residual soil and/or groundwater impacts that remain in place despite the issuance of regulatory case closure by the oversight agency. Due to residual impacts remaining in soil and/or groundwater, future property use may be limited to certain industrial uses and it is important for a property owner to understand those limitations, especially if they plan on redeveloping the property for a different use. This is an example of an IC. An EC may include the construction of a slurry wall or capping contamination to prevent exposure to hazardous contaminants. Often there will be a continuing obligation to maintain the integrity of an EC in place at a property. A Phase I ESA report should identify any Environmental Liens or AULs and document any continuing obligations.
Other potential concerns include manufacturing operations which utilize hazardous substances, the current or historical presence of septic systems, which can act as direct conduits to the subsurface, aboveground storage tanks (ASTs) and associated fueling, vehicle maintenance and repair operations, and improper hazardous waste storage and/or disposal practices.
Working with an environmental consultant with experience assessing industrial properties, that helps to manage expectations during the process to avoid any 11th hour issues, and provides detailed reports that clearly outline the findings and conclusions in a concise and logical manner, will be beneficial to any investor looking at industrial properties acquisitions in 2013.