July 12, 2017
There’s a growing shortage of “last mile” warehouse spaces. These relatively small warehouse spaces are often the last step in the journey of products bought online before they are delivered to the homes of consumers. They often need to be built in urban or suburban neighborhoods, where land is hard to find.
“There’s a lot of interest for ‘last mile’ providers,” said Paul Fishbein, a partner with Merit Partners. “Last mile providers are well under-served.”
Fishbein spoke at “Development & Adaptive Reuse: Creating and Re-Creating Space,” a panel at Connect Industrial’s inaugural conference in Chicago on June 28th, moderated by David Friedman, president of Conor Commercial.
The panel highlighted the challenges and opportunities of industrial development today. Demand is strong and the business is healthy — but some of the most desirable types of warehouse space are difficult to build, often because of the shortage of land in prime locations. “The price of that land would be very bid up,” said Fishbein.
Banks make an exception for industrial
Financing can also be a challenge, as the banks that have traditionally provided construction financing sometimes struggle to comply with new regulations, including requirements that they store capital in reserve to offset the risk of investments like construction loans. However, banks are still willing to lend to desirable real estate developments like industrial projects.
“Industrial is probably the darling,” said Martin Kearney, director in the institutional commercial real estate group at Bank of Montreal (BMO Harris Bank). “We see a lot of opportunities right now.”
Private equity funds are also helping to finance new industrial properties. “There are more and more of those debt funds out there — they are a growing part of the capital stack,” said Kearney.
Government money for development
Developers may also benefit from government subsidy programs that can help pay the cost of construction. “It’s basically free money,” said Neil Freeman, a principal with Aries / Conlon Capital. Developers who redevelop older, landmark buildings may benefit from federal historic rehabilitation tax credits. Developers who build in low-income neighborhoods may benefit from federal New Markets Tax Credits.
Utility companies may also have programs that help pay development costs. “We have got a half-million dollars from ConEd for improvements that we would have done anyway,” says Fishbein.
As unemployment falls lower, industrial developers are also making sure that their properties include amenities that will help them keep employees. “Clearly it’s a good location relative to transportation,” said Kevin Matzke, managing partner with Clarius Partners. “And they want to be located next to a gas station.”
“If you look at all the different risks that industrial tenants have in front of them, the one that scares them the most is a lack of labor,” said Matzke. “Because that’s the thing that can put them out of business the quickest, and how their costs can shoot up in an uncontrollable way.”
For comments, questions or concerns, please contact Bendix Anderson