Industrial Supply Shortage Worst for Owner-Users

The industrial supply shortage is impacting owner-users the severely. Specifically, owner-users moving from rental industrial space to owned industrial space are having the most difficult time looking for space. In San Diego, the market for industrial sale opportunities are limited—even tighter than the lease supply—but with a large hub of biotech firms, there is ample demand to own a property. The demand from owner-users has fueled big price increase for for-sale product.

“We have a lot of owners that want to buy a building,” Barry Saywitz, president of the Saywitz Co., tells GlobeSt.com. “The market is doing well, and they have money, so instead of paying all this rent to someone else, they want to own a building. The dilemma then becomes that there are even less buildings to buy than there are for lease, and then those prices have increased significantly. We have plenty of clients that want to buy a building, and we ultimately to come back and tell them that there is nothing to buy.”

The tight leasing market is exacerbating the problem. When users are looking to a space to buy while leasing a property, they often run into a timing issue. If they haven’t secured a property by the time the lease term has ended, they may have no choice but to renew. “We have to then tell that they need to renew their lease,” explains Saywitz. “The option is either to renew the lease or sign a short-term lease and keep looking. If you choose a short-term lease, the rents keep going up. If I come back to revisit it in a year or two, you are going to pay more either way. It really comes back to what is your business plan. In San Diego, we have seen it catch up.”

All types of users looking to buy are having a similar problem, but lab users have a specifically difficult time because of the specific needs of the space. “The industrial space in La Jolla is lab space, and it is a completely different animal,” says Saywitz. “Those spaces run at a premium because it is hard to find spaces with that kind of use an infrastructure in them already. Those companies that need them spend a lot of money to get it, and so they can’t just go buy a building.”

For these clients, moving at all—even to another rental space—can be a challenge, and it has contributed to the rent growth. Saywitz experienced this very issue with a recent client. The user signed a five-year lease in a warehouse space and then converted the property into an R&D facility that me its needs. At the end of the lease term, the tenant was facing a 100% increase in rents. “The rent was based on the condition of the building before they move in,” says Saywitz. “If we price it as if it is R&D space, the rent is double. If we price it as warehouse space, it is not, but it isn’t really warehouse space anymore because they have improved it. The company created its own market because if they leave and go into another building, it will cost $2.5 million to recreate the improvements they made in the current building.” Saywitz added that a new landlord isn’t going to give money for tenant improvements or take the property off the market while the user completes improvements because the market is so tight. These factors create limited options for these users.

His advice for owner-users looking to secure a property: plan, plan, plan. “You have to have a plan,” he says. “You cannot wait until the end.”