The owner occupant strikes back - by David Skinner

In today’s article, I share some of the history of what has created the industrial investment bubble, particularly in Boston suburbs of 128/495. If you are an owner occupant along the 128/495 corridors, do not be bashful about approaching property owners to lease or purchase at what might have been considered uncompetitively low. You may find exactly what you need.

The industrial real estate industry has drastically changed in the last eight years since I began my career in 2017. Boston used to be one of the biggest small towns in the world, with global leaders and innovators coming to Boston for education only to resettle all over the world. Greater Boston industrial real estate was largely if not exclusively owned by local businesses, families, and real estate investors.

When the Federal Reserve brought interest rates to historic lows in 2008 and kept them there for almost 15 years, cash began building up and up and up. This created a new need for folks with money to invest: they needed to get the money out the door and into some investment vehicle. For those interested in real estate, they began to invest in multifamily, office, and retail. These were the historically most stable real estate vehicles.

Then entered syndicators, fund managers, and private equity groups that deployed this capital across the country and world; but there was a real problem. They bought all the assets available but had oodles of leftover money screaming at the fund managers to be deployed. These bundles of cash were on their hands and knees begging to be spent in whatever way the fund managers felt necessary. The fund managers had an existential question that demanded an answer: what do you have to buy?

Couple this with the growth of Amazon and then a global frenzy over a novel coronavirus that kept everyone ordering everything from home, and you have the new Industrial Revolution. Industrial real estate became the new investment vehicle where blue-chip, investment-grade companies signed 10+ year leases and investors could receive a 7%+ yield on cost.

This is where I began to identify a trend when seeing record sale prices of $150 per s/f in a historic $50 per s/f market: strong companies with good businesses, strong balance sheets, and long histories would express to me an interest in growing their real estate footprint to help scale their business, but their businesses could not afford this brave new world of real estate valuations. Over a period of a few years, neither owner occupants nor tenants could pay the values required by the private equity groups in order to hit return thresholds.

As it would follow, deal velocity began to slow. Sales were fewer and farther between; they took longer to underwrite and close, and buildings that may have had bidding wars for lease a few short years ago were now quietly sitting vacant for 6, 12, some even 18+ months due to overvaluation.

Slowly but surely, as the law of supply and demand would dictate, pricing began to fall. Buildings advertised for lease were quietly being marketed for sale in order to simply facilitate an exit for a sweating property owner. Lease rates were advertised at top-of-the-market numbers, but listing brokers would begin following up a property tour with a sometimes not-so-discreet message: “Please make me an offer.”

This is the time that the owner occupant had been waiting for after many years. As the leasing market has softened considerably, industrial landlord anxiety is at the highest levels in years; and while the outlook for interest rates seems to be looking up, they are still higher than they have been since before 2008.

This brings opportunity to a well-run operating company for both sale and lease looking for real estate. A transaction for lease at what might be considered “below market,” a break-even sale, or even a sale at a small loss may be considered as a way to take chips and risk off the table for the property owner.

Owner occupants are focused on basis, which means they need to purchase the real estate at a reasonable enough going-in basis. Because the business occupies the building, lower ownership costs reduce their occupancy cost per s/f, directly boosting their operating margins. A smaller debt load and lower break-even point make the business more resilient if revenues dip or they later sell.

We have closed and are in the middle of closing a number of transactions like this on behalf of our owner occupant and tenant clients. We would love to share more with you about how that is going if you would like to hear more!

‍Prescott is an award-winning commercial real estate brokerage specializing in selling and leasing industrial properties with a focus on Industrial Outdoor Storage (IOS) in Greater Boston and throughout New England. If you own this type of property and you are interested in a sale or lease evaluation or you are looking for property that is very difficult to find, please reach out to me at david@prescottios.com or call our office at (617) 340-3332.

David Skinner, SIOR, is an advisor, partner of Prescott, Lincoln, Mass.