The real estate market — thanks to the
failure of Fannie Mae, Freddie Mac
and other big lending institutions — is in total upheaval.
This turbulence, which has influenced
the whole international economy, can have
a tremendous impact on your business.
“At the end of day, make sure that the
consumer — the person whose business
relies on the product — gets it in a timely
fashion and that the costs of delivery are as
low as possible,” says Blake Anderson,
SIOR, Senior Vice President in Grubb &
Ellis Company’s Dallas office.
Smart Business talked to Anderson
about making industrial real estate decisions in this economy.
How are companies that are contemplating a
new facility coping with the current economic situation?
On the leasing side, there’s a tremendous
slowdown in decision-making. Executives
are saying that maybe they don’t need that
brand-new distribution facility, if they can
continue operating as they are today, thereby incurring less risk and keeping costs
down. A lot of companies are just renewing
leases for six months or a year instead of
five to 10 years.
On the user acquisition side, instead of
spending substantial dollars on moving and
consolidation costs, CEOs and CFOs —
who are compensated on bottom-line dollars — are keeping their purse strings tight.
What benefits are obtained through ‘value
engineering’?
‘Value engineering’ your facility is taking
a conservative approach in making your
facility functionally sound but not spending extravagantly. One or two years ago,
tenant representatives were asking landlords for high-end everything, from lights
to flooring to dock equipment. Today, with
construction costs being so high, some
landlords are willing to amortize those
costs back into the lease but only if the tenant has strong or substantial credit. My
clients are often setting aside tenant
improvement dollars for future use to keep
overall occupancy costs down.
Value engineering has to be the theme
now that companies are learning to operate on a tighter budget. If the C-level people
making the decisions are wasting money,
they are not doing their job.
How important today is a company’s logistics
team in choosing the right location?
Logistics is how the product gets to the
consumer efficiently, quickly and with
the lowest costs possible. Fifty percent of
the cost of logistics is transportation.
Labor is about 17 percent. Rent is just 4 to
5 percent.
With the rising cost of transportation, it’s
even more important to bring a logistics
team into the decision-making process
from day one, because a difference of
50 miles can change the economics
tremendously.
A logistics team and its expert advisers
must look at potential locations based on
labor costs, labor availability, incentives,
ease of doing business, access to major
thoroughfares, and access to intermodal
and/or freight rail. Those are key elements
in making a sound decision.
Can good values still be found in the industrial real estate market?
There is very little on the market as far as
investment real estate. However, off-market deals from owners who find themselves in must-sell situations are increasing
in numbers each day.
Conversely, there are a lot of great lease
deals. If tenants are looking to renew,
they’ll find great concessions. Because
landlords don’t want vacancies, they are
being very accommodating, especially with
shorter terms, while still asking for market
rental rates. This is not the time to have
empty buildings.
What kind of terms are banks offering nowadays — if any at all?
‘If any at all’ is the key. Most big lenders
have completely shut down most of their
lending — even to AAA-type borrowers —
until the beginning of ’09. There’s simply
too much risk involved.
Lending sources are offering 60 percent
debt with 40 percent equity — or 70-30 if
the lender is 100 percent confident in the
borrower’s ability to repay the loan.
Though we are starting to see more
defaults, it’s nothing like the housing market. Largely, the defaults are limited to
manufacturing-type buildings.
Do you believe that now is the time to invest
in industrial real estate, or should investors
wait?
There are obviously different levels of
investors. If you’re flush with cash and you
can gather information from a market
expert on a particular opportunity, this is a
great time to find that off-market deal. But
you have to make sure the asset is in a
great location and it’s functionally sound.
For big institutional buyers who are just
buying cash-flow-type assets, I don’t see
many opportunities; the best opportunities
are for the small local or regional investor
who can find the off-market deal.
BLAKE ANDERSON, SIOR, is Senior Vice President in Grubb & Ellis Company’s Dallas office. Reach him at (972) 450-3207 or
[email protected].
