Industrial Land Prices Compete With Multifamily

Industrial land prices are reaching historical highs, and are now competing with multifamily land prices in some areas. Land prices have been in fueled by the tremendous demand and industrial rent growth in the last few years, which has led industrial to become one of the most profitable asset classes for development. Now, the market is competing with multifamily pricing. Although zoning restrictions don’t often allow the markets to compete directly, the comparison illustrates strength of the industrial sector.

“Industrial is a great return, and it is so low on the risk profile compared to the other asset classes,” Louis Tomaselli, senior managing director at JLL, tells GlobeSt.com. “If you lease a big box for five years, you don’t have to put that much money into it. If you are leasing the same square footage in multifamily and you are turning leases every year, the cost is much higher than industrial.”

While zoning restrictions don’t often allow the two markets to compete, Tomaselli says that it is a possibility in the future. In the Irvine Airport market, he has seen an increase in both industrial and multifamily development. “Industrial rents are so high now, building industrial is more profitable than multifamily,” says Tomaselli. “We had a lot of multifamily taking the place of industrial in the Irvine Airport area, but right now, industrial land is almost to the same price as multifamily land. You may see multifamily now being challenged by industrial.”

Industrial developers have also looked at retail land or outdated retail product for industrial conversion, but zoning issues are an even bigger obstacle. As a result, new construction is the best option for new industrial supply, a trend that has put more pressure on land pricing. “Big box centers with inline boxes can be converted easily, but you get into city zoning issues. The city was promised retail tax generation from those locations,” explains Tomaselli. “At some point, they are going to have to realize that there is no retail tax generation anymore because there are no retailers that can make money at the property. Cities are going to have to agree to let industrial users go into those spaces.”

This trend isn’t slowing down. Industrial has truly become the darling of commercial real estate investment, and pricing is following suit . “This is the most exciting time because of the technological advances has made a simple industrial box the most popular asset class across the world,” says Tomaselli. “If you want something in an hour, it has to come from somewhere.”