How to Make Strategic Industrial Upgrades

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SAN DIEGO—Conversion from traditional to lifestyle space doesn't have to mean a complete property overhaul, SR Commercial principals Adam Robinson and CJ Stos tell GlobeSt.com. We spoke with them exclusively about trends they're seeing in industrial development and investment as well as some strategies for upgrading industrial properties.

GlobeSt.com: What are the latest trends you're noticing in the industrial-investment realm?

Robinson and Stos: On the multi-tenant industrial side, cap rates are getting lower, and price per square foot continues to rise. One major trend that is emerging amid this activity is an increased change of focus among large institutional investors. Traditionally, larger institutions have focused on larger deals, with minimums around $30 million in deal size. Today, these investors are looking at deals as low as $10 million, which is amping up competition in the mid-cap market.

For investors who specialize in mid-cap properties, like our firm, this means that differentiation is key. We believe that we still have a competitive advantage based on being smaller and local—we're able to move more quickly when it comes to releasing the deposit for a deal, and we know the market and have strong broker relationships, which gives us better access to off-market deals. Those deals are essential to making acquisitions in the current industrial market.

GlobeSt.com: What are owners doing on the property level to drive value in the current market?

Robinson and Stos: Certainly, a push toward creative space is the most overarching trend in the current market. Today's tenants want it, and landlords who invest in converting properties to creative space are typically able to achieve rents that justify the capital investment. In many case, this doesn't require a complete overhaul of a property. Instead, smart operators can make strategic choices that will drive value in specific markets.

For example, we've found that solid interior-space improvements help us to push rents, and we've built value by adding unique, creative elements to a space, such as operable windows and/or rollup doors. Exterior amenities are also a huge driver of value. In our properties, we've added cool amenities such as basketball and bocce-ball courts, as well as interesting design elements such as unique pavers and synthetic grass. We also look for opportunities to leverage “unusable” space. For example, there is a 4,000-square-foot space in one of the buildings we own that we know won't lease well, so we are working to convert it into a gym for nearby tenants. Lifestyle amenities like these will continue to be in demand from tenants.

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GlobeSt.com: What are the challenges to industrial investment on both the buyer's and the seller's side?

Robinson and Stos: Competition is the main challenge in the industrial-investment market. Industrial properties in San Diego are attracting tremendous investor interest, generating anywhere from five to 30 bids on average. The key to acquiring in this climate is finding off-market deals. Roughly 60% of the acquisitions SR Commercial has made to date have been off-market. The secret to locating these deals is good broker relationships, which are simply essential, as well as a strong understanding of the local market. On the seller side, there aren't many challenges in today's market—it's a great time to be a seller. Interest rates are still low, and most properties will garner many looks and multiple offers.

GlobeSt.com: What else should our readers know about this topic?

Robinson and Stos: It's extremely important for today's investors to ensure that their operators have the future in mind with regard to industrial investments. The market is hot right now, and frankly, it's easy to lease space. However, we all know that markets are cyclical, and there will come a time when leasing and dispositions become more challenging. To prepare for that time, operators must ensure that today's deals are arranged with low leverage and that reserve capital is on hand.

As investors and operators ourselves, we approach our long-term-hold assets with a long-term vision, and we're working to make improvements now that will ensure that our assets are well positioned down the road. For those assets that we plan to hold for a short time, we still work to ensure that leverage and capital levels make sense based on potential market fluctuations.