Advances in Logistics Fuels Industrial Obsolescence
Demand for industrial space has pushed vacancies to historically low levels. But the high tide may no longer be lifting all boats. A surge in new supply along with a growing appetite for more modern facilities is putting more pressure on the sector’s aging building stock. Legacy buildings are having a tougher time keeping up with the changing demands of today’s space users.
Unlocking the Value of Aging Industrial
The appetite for close-in, just-in-time industrial locations has helped sustain demand for even less-than-ideal facilities. However, investors are also seizing on opportunistic and value-add strategies to repurpose or redevelop aging industrial properties into better functioning, higher value assets.
According to Cline, over 85 percent of the industrial stock in Downtown Central Los Angeles is considered economically obsolete. “This means that the underlying land value for alternative uses or development purposes exceeds the value of maintaining the old buildings. Many of these obsolete buildings can potentially be repurposed or selectively demolished and rehabilitated to meet users’ needs,” he says.
The investment strategy varies depending on the location and characteristics of the existing structure and site. Industrial real estate is the “Swiss army knife” of real estate asset classes, says Cline. In other words, investment strategies for legacy industrial assets run the gamut from total or partial demolition to renovation of existing structures to modernize and make them more marketable. As an example, Lee & Associates is working on one project in L.A. where the roof is being raised from 16 feet to 30 feet. “Where you find elements of a property that do work for modern logistics and can enhance and or correct other elements, you make those improvements,” he says.
In addition, there is significant capital being raised for opportunistic and value-add strategies targeting industrial and logistics real estate. For example, BKM Capital Partners is currently raising its third industrial real estate fund with a target of $500 million. The company specializes in the acquisition and improvement of value-add, light industrial, multi-tenant properties in metro areas across the Western U.S., with a focus on acquiring small-bay industrial in particular.
“Our strategy is taking this older product and transforming it into that new modern style from both an aesthetic and functionality perspective,” says Brett Turner, senior managing director, acquisitions and dispositions at BKM Capital Partners.
Because industrial tenants are using more technology, they also need people who know how to use that technology. For some firms, that means attracting a higher level of talent. “How do you get someone with a master’s degree to go in an industrial park?” says Turner. “You have to make it cool. You have to make it creative, and you have to make it close to amenities and in-fill.” So, in addition to functionality there is an aesthetic component that real estate needs to help attract labor, he adds.
Read the entire article from ULI here.
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