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Warehouses have been thought of by some as just
"big boxes" and, therefore, have not had the aesthetic or intellectual
appeal for some. In reality, the design, layout and configuration of many
warehouse buildings have more variety and complexity than many office
buildings. Warehouses vary considerably in size, shape, height, docking,
access and interior improvements.
The single-level design of a warehouse does allow for a relatively short
(four to eight months) construction period. We believe the short construction
cycle has contributed significantly to the supply and demand balance.
The overall space market is less likely to have significant change between
project conception and completion. A retail or office project may take
two to four years to complete and the market could have changed dramatically
during this time period. The shorter construction cycle tends to smooth
out the cycle and reduce volatility.
The national market vacancy is favorable compared to other property types.
We believe that the most quoted vacancy rates for industrial markets are
actually overstated because an increasing portion of the rate is attributable
to functional obsolescence. Most new warehouse space is being constructed
on a build-to-suit or pre-leased basis. The relatively low amount of speculative
building contributes to a reduced overall vacancy rate.
Industrial property investment offers several unique characteristics which
enhance performance. These include tenant credit selectivity, minimal
capital costs, net lease structure, and disposition advantages. Most warehouse
investments involve individual buildings with one to three tenants versus
the ten to fifty or more tenants common in an office or retail investment.
Therefore, ownership is able to analyze the individual tenant credit to
a much greater extent and actually be more selective, thereby reducing
financial risk.
Warehouse property as a class requires minimal capital expenses (tenant
improvements and leasing commissions) compared to office or retail. The
major physical costs are roofs and parking lots which have a 15-20 year
life. Interior improvements are generally modest. Tenant improvement costs
upon releasing typically do not exceed $.50-1.00 per square foot compared
to $10.00-40.00 per square foot for retail or office. Leasing commissions
for industrial range from $.50-1.00 per square foot versus $2.00-6.00
per square foot for office and retail. These lower costs contribute greatly
to the stability of the income stream, which is common in industrial.
Warehouse leases are typically written on a "net" or modified gross basis
which shifts the operating and real estate tax expenses and increases
to the tenant. In some larger single tenant warehouse leases it is possible
to write the lease on a triple net or bond lease basis whereby the tenant
is responsible for all expenses including structural and parking lot expenses.
This type of lease is the ultimate risk management tool for the investor.
Lease terms for industrial typically range from five to fifteen years
versus three to ten for retail and office. This longer term structure
further adds to risk reduction.
Warehouse properties have some disposition advantages due to a wider choice
of buyer types. In addition to the institutional investor market, tenants
as users and wealthy individuals as investors, often as a part of a 1031
exchange, are active buyers of warehouse properties. A wider or deeper
market reduces risk during the disposition phase.
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