'Land Prices Can't Fall': Market Factors Make South Florida Industrial Almost A Sure Bet
Ed Easton started his industrial real estate company, The Easton Group, in 1974. He now controls about 5M SF of space.
"When I started in the industrial market, nobody liked industrial," he recalled during a Bisnow webinar on South Florida's industrial market Nov. 18. "When I first took my wife off to see what I did for a living, she said, 'What the heck is this?' She didn't get it. Nobody got it."
That's certainly different today, in the era of e-commerce.
Until now, there have been fewer than 10 companies having any significant involvement in the local market, Easton said. That is starting to change, with more players in fierce competition for limited assets.
"We're seeing some firms coming in from Chicago or even out west and the California market who are trying to penetrate this market," Duke Realty Regional Senior Vice President Stephanie Rodriguez said.
Jason Tenenbaum, vice president for Prologis in South Florida, oversees about 20M SF of real estate in three counties.
"You've got the ocean to the east and then 20 miles to the west, you have the Everglades, so we're pretty land-constrained," he said. "There's only so much that we can build. We're going to see rents go up. We're seeing operating expenses go up, taxes go up, construction costs go up, so everything's gonna just keep going up, and I think there's a lot of runway there."
Jonathan Kingsley leads a team of 10 for Colliers International's office and industrial brokerage in South Florida, overseeing a portfolio of about 6M SF. Kingsley said that Broward County has only about 300 acres of land left that could be suitable for industrial uses.
Nearly 1,000 people per day move to Florida. "Historically, each person needs 74 SF of warehouses when they come here. So you just multiply the number of people coming here times 74 SF and that's kind of the demand side," Easton said. "The land prices can't fall under these circumstances. The people that own the land, if they don't get their price, they just don't sell. They've owned it for a long time and there's no motivation."
Given the high land costs, plus the expenses of constructing an industrial building, tenants have to pay about $11 per SF for landlords to get a 5% return, Easton said.
"Once you get rid of that 25M SF that we have left to build, I think you're going to see prices like Chicago, New York, LA for industrial. I think that's why the big players who understand these broader market situations are so anxious to be in Miami," Easton said. "I think they're buying stuff at 3% or 4% return. And if they're right about the rent increases, they can end up with a 11% to 15% return in four or five years."
As for challenges in the sector, the panelists said not to discount the coronavirus, as Florida's hotel and cruise lines are still suffering. They also said that despite hype over cold storage, such facilities take long lead times to build and don't make sense financially unless a creditworthy permanent tenant is secured.
As for opportunities, the panelists said that even with Amazon making headlines for its huge warehouse facilities, most tenants take 20K SF or less, so there is appetite for smaller sites. Rodriguez said there may be opportunity in reverse logistics since 25% to 30% of purchases made online get returned.
Kingsley said that the industrial sector will thrive whether people shop in stores or online.
"Target released their numbers today, and their same-store sales were up something like 9% year-over-year, which is incredible," he said. "So, there still is a thirst for folks to get back into stores and to do traditional shopping. Good news for industrial is whether it's coming from e-commerce warehouse or a large distribution center servicing the retail stores, it's just more and more industrial demand on a market that's extremely tight on land."
CORRECTION, 3:30 P.M. ET Dec. 3: Jonathan Kingsley's last name was originally misspelled in an earlier version of this article. The error has been fixed.