How Dynamic Market Conditions Are Impacting Industrial Deal Cycles
The industrial real estate sector’s robust expansion continues at a consistent pace. Developers are striving to keep up with strong demand for industrial space amid dynamic market conditions shaped by limited supply and a scarcity of developable land.
While the sector had already been on an upward trajectory prior to the pandemic due to the rise of e-commerce, the last two years have further accelerated existing trends such as surging retail sales and consumer expectations for faster delivery. As a result, these factors have led to tight competition for available space and accelerated deal cycles.
Trends Shaping the Sector
The pandemic has also spurred new trends such as increased institutional investor interest in industrial product. According to the PwC-ULI Emerging Trends in Real Estate in 2022 study, the industrial/distribution sector ranks first for both investment and development prospects for the ninth consecutive year. As a recent example, Creation RE and institutional investors advised by J.P. Morgan Global Alternatives formed a joint venture with plans to invest $1 billion in industrial, warehouse and logistics real estate projects across four states.
U.S. port markets have also experienced substantial growth owing to increased trade volumes. According to a recent NAIOP research brief on the relationship between imports and site selection for logistics centers, while the strongest relative increase in demand has come from smaller markets near recently expanded ports, the Los Angeles-Long Beach port complex has seen the largest growth in total trade volume, boosting demand for local industrial real estate.
Occupier leasing started to accelerate in early 2021 as the economy began to reopen, placing pressure on rental and vacancy rates, the PwC-ULI study found. Intense demand for industrial space has led to record-setting supply and vacancy levels in the U.S. The national average rent reached $6.45 per square foot in February, equal to a 4.4% increase year-over-year, according to a recent CommercialEdge industrial report.
A sharp emphasis on relieving supply chain disruptions has prompted companies to stock up not only on goods but on space as well, leading to fast-tracked deal cycles and even more competition for availabilities. These trends are driving a transformation in the industry, as companies shift toward a more resilient supply chain strategy. As stated in a Savills analysis, renters are building resiliency through just-in-case inventory management, moving away from the just-in-time approach to offset the material and labor shortages heightened by the pandemic.
Shifting Deal Terms
As competition for industrial space remains tight, companies in search of availability are adjusting their strategies. While the industrial pipeline is expanding rapidly and developers try to keep up with demand, landlords are significantly reducing proposal limits.
What was once a 40-, 60- or 90-day limit has shrunk to a 30- and even 15-day limit on proposals, Lawrence Garb, executive vice president at Hartz Mountain Industries, remarked at a panel discussion during YASC 2022.
As of February, the national vacancy rate averaged 5.2%, marking a 30-basis point (bps) drop compared to January, according to CommercialEdge data. While vacancy rates continue to contract, industrial lease spreads are on an upward trend, based on Yardi Market Insight data from CommercialEdge Research.
Industrial lease spreads in highly sought-after markets such as Los Angeles have reached 14.5% based on the most recent data. New Jersey lease spreads hit 11.9% and Dallas-Fort Worth followed with 11.3%. At the same time, office lease spreads in these markets were notably lower at 6.8% in Los Angeles, 1.2% in New Jersey and -0.3% in Dallas-Fort Worth.
How to Streamline the Deal Life Cycle
In view of the industrial sector’s ongoing expansion, landlords are emphasizing automation and portfolio visibility to facilitate the deal cycle’s efficient execution. So, the importance of a dedicated service that streamlines marketing operations and provides centralized deal visibility cannot be overstated.
From generating quality leads to centralizing communication at the deal level, industrial operators intent on simplifying their processes are implementing innovative solutions that provide complete deal oversight. For instance, the Yardi Elevate commercial suite includes a pipeline management solution that tracks the full customer journey from lead to lease, as well as a listing marketing platform and a full-service marketing team.
- Mapping everything in one place
Such connected solutions eliminate disconnected processes and provide operators with a 360-degree view of their assets. To that end, Deal Manager maps everything in one place, bringing marketing operations, deal flow and legal workflows under one umbrella. The all-in-one tool fast-tracks the entire leasing process, significantly reducing deal cycles.
Leasing teams can update and manage listings easily on a centralized platform such as Edge Marketing, which ensures maximum portfolio oversight. Additionally, connecting this type of marketing module with property management software, for example, allows for powerful synchronization across portfolios. That is the case with the seamless integration of Edge Marketing with Yardi Voyager, which syncs properties, spaces and availability, and enables the automated publishing and removal of spaces.
- Increasing quality leads
While the tight competition for space in the current industrial real estate climate means there is no scarcity of prospects looking to lease space, generating qualified leads can still be challenging. Therefore, marketing listings on specialized CRE platforms that provide amplified exposure and produce verified leads are essential for an effective lease process.
As an example, the Edge Marketing listing and syndication network provides maximized visibility across commercial markets. The CommercialEdge Listing Network boosts qualified leads through automated listing distribution across its five marketplaces, as well as through syndication to property websites and top third-party platforms, including CoStar.
Furthermore, Edge Marketing provides the tools to nurture and grow leads through branded marketing collateral. In addition, the marketing module includes the functionality of powering custom-made property and company websites with information already provided in Edge Marketing.
- Enhancing and centralizing deal visibility
As the next step, creating a deal, whether simple or complex, can also be accelerated by using a dedicated platform that centralizes deal visibility. Solutions such as Deal Manager provide leasing and asset managers with access to tenant-related information or space visibility in a single place, with centralized deal tracking, proposals and approval workflows. The pipeline management solution closely monitors detailed deal metrics, automatically comparing deals to approved budgets and populating forecasts.
Deal Manager — also developed to sync with Voyager — streamlines deal cycles by providing comprehensive site plans, as well as real-time tenant and lease data. These include rent schedules, clauses, options and expenses, as well as a complete overview of an operator’s client base.
Additionally, the deal pipeline management tool makes it easier to stay on top of lease terms. Thanks to the transparency it provides, lease expiry dates can be tracked with ease from a portfolio view.
At the same time, an in-depth property-level view is just as effortless. With the upcoming portfolio map functionality, clicking on a property pulls up space and tenant info, which can be compared in real-time to average market metrics through the Yardi Market Insight tool. This enables companies to adjust their strategies based on a comparison between signed lease data vs. lease averages and average asking rates in the area.
- Simplifying legal processes
Another essential step is the legal component of the deal cycle. This stage can also be optimized with tools that generate accurate lease documents and provide a centralized system where everyone involved can review the agreement and track revisions through the final signed documents.
For example, Deal Manager Legal auto-generates standard lease agreements based on finalized proposals and features dedicated activity feeds to improve collaboration. And the built-in e-signature functionality enables an easy signing process, further simplifying the lease life cycle.
As industrial vacancy rates continue to contract, rental rates are slated to remain on an upward trend through 2023 due to intense occupier demand, according to a forecast from Cushman & Wakefield. With a large share of the development pipeline pre-leased well in advance of completion, tenants in search of industrial space must navigate a wealth of challenges.
However, even with intense demand for space, industrial operators focused on efficient and smooth leasing operations should consider streamlining deal cycles with the help of connected solutions that provide transparency and simplify operations.