The Industrial Yield Squeeze Is On

Riorda: “As real estate experts, we need to be cognizant of the effect of regulations and related fees, and their collective impact on rental rates.”

NEW YORK CITY—Outsiders to the industry may praise developers for their attention to environmental issues such as storm-water management. However, in many cases it’s a consciousness born of necessity, as those initiatives are based in local, state and federal regulations falling under the auspices of the 1972 Clean Water Act and the EPA. One of the nation’s critical areas in terms of storm-water management is the Chesapeake Bay Watershed, and Allan Riorda, president of Lee & Associates’ Chesapeake Region office, sees the regulations as a mixed blessing.

“In the early ’80s the state of Maryland implemented a system designed primarily to reduce flooding and sediment that was pouring into Chesapeake Bay,” says Riorda. “The bay had lost a substantial amount of natural grasses and other plants which, among other things, adversely affected the oyster beds.” The state needed to clean that up to ensure a healthy bay. The good news is that “there’s been significant improvement in the water quality,” added Riorda.

The bad news? “When developers introduce required water-management systems into their site designs, it simultaneously adds cost and reduces the amount of land available to support rentable building area. It all filters down to rental rates,” says Riorda. “As real estate experts, we need to be cognizant of the effect of regulations and related fees, and their collective impact on rental rates. One solution that has been implemented is using a regional storm-water management plan, which, according to Riorda, “essentially creates one larger pond shared by several buildings.”

Van Buskirk: “As e-commerce becomes a larger and larger part of the industrial landscape, the need for more parking—especially cars—will grow, given the high employee counts and multi-shift operations typical of fulfillment center operations.”

John Van Buskirk, Riorda’s counterpart in Eastern Pennsylvania, couldn’t agree more. “Development projects need to meet the owner’s expected return criteria, which are ultimately a reflection of market rates and their relationship to delivered costs.” Unfortunately, storm-water management is only one of several challenges with which industrial developers are wrestling in their quest to deliver the next generation of sites.

For example, Van Buskirk points out, “as e-commerce becomes a larger and larger part of the industrial landscape, the need for more parking—especially cars—will grow, given the high employee counts and multi-shift operations typical of fulfillment center operations.”

None of which changes the need to provide “friendly yard areas with plenty of trailer parking, where drivers can come in, drop their loads, and quickly and efficiently go on with their day,” says Van Buskirk, adding that “the heavy investment many occupiers are making in equipment and people has compounded the issue, inasmuch as they want to protect the ongoing viability of their operations with flexibility in the form of vertical and horizontal expansion opportunities.”

For the most part, the whittling-away of industrial yield hasn’t been an overnight transformation. Rather, “it’s been a game of inches and feet fueled by incremental regulatory pressure and changing market dynamics,” says Van Buskirk. “A little bit here and a little bit there, and you wake up one day and say, ‘Where are we, and how did we get here?’”

Solutions? There really are none. “It’s just another cost of doing business,” Van Buskirk concludes.

The industrial sector has become the hottest segment in commercial real estate. How will logistics companies keep up with the market forces of omnichannel commerce? When will new supply finally catch up with demand? Who’s putting investment capital into industrial and what does the future hold? Join us at RealShare Industrial on November 16 and 17 for answers to these and other questions. Learn more.