Strong Activity Continues 

Development activity remains strong after construction peaked in 2015 at 3.9 million square feet, of which 55 percent was speculative and 75 percent overall was bulk warehouse. However, there has been a shift from speculative bulk warehouse to speculative office warehouse and increased velocity in single tenant build-to-suit projects of 150,000 square feet or more. At third quarter of 2014, there was 3.2 million square feet under construction, of which 72 percent was speculative and 84 percent overall was bulk warehouse. There is currently just over 2 million square feet under construction, 40 percent in speculative space and 43 percent overall in bulk warehouse space.

Main Drivers 

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The two main drivers behind the build-to-suit market are the low cost of capital available to owners and developers and the fact that companies are becoming more sophisticated and allowing themselves adequate time to explore these build-to-suit options. In exchange for a good credit company and a long term lease, developers and owners are able to provide very aggressive lease terms which in some cases have exceeded what existing properties are able to offer. This is extremely attractive to companies, not only because of the lease terms being offered, but it also allows them the opportunity to get exactly what they want in a building and ensure they are maximizing operational efficiencies. For instance, items such as column spacing, building depth, clerestory windows, LED lighting, off-dock trailer positions and maximizing cube space via clear height and material handling are just a few of many building attributes companies give careful consideration to. AmerisourceBergen and Milestone AV Technologies both opted to go the build-to-suit route are prime examples of this trend.

 

What Does This Mean For Existing Class A Bulk Properties Available With Vacancy?

There is still a significant amount of demand from users who either don’t have the time to consider build-to-suit or users that want the flexibility of a shorter lease term.

“In exchange for a good credit company and a long term lease, developers and owners are able to provide very aggressive lease terms which in some cases have exceeded what existing properties are able to offer.”
In spite of the strong development occurring in the last few years, Rossbach does not see the market as overbuilt. “Although there is some uncertainty, overall market activity remains steady and we anticipate the rest of 2016 and 2017 to be similar to the activity we have seen this year.” Long term outlook and substantial changes in the cost of capital will have a more profound impact on the market as a whole.