As the retail sector continues to adapt and evolve to meet consumer demand for e-commerce and next-day or same-day delivery, industrial real estate will hold its place in 2018 as the top-ranked property sector. The property type has held this title for the past four years, according to the annual Emerging Trends in Real Estate study, conducted by PwC and the Urban Land Institute.
The growth of e-commerce has been so rapid that the demand for industrial warehouse space has far outpaced supply in most markets for years. However, Emerging Trends also indicates that supply and demand began to come into balance in 2017 and will continue to do so in 2018.
Michael D. Hoover, DH Realty Partners Inc.
That balance gives users the opportunity to pay for industrial spaces that better suits their needs, as new buildings with increased technology and other amenities are popping up in prime areas. The growth of e-commerce has also created new demand for properties that were previously considered Class B and C industrial buildings, particularly those located along the “last mile” to consumers in urban areas.
Basic Stats & Trends
Current demand for industrial real estate in San Antonio is highly diverse. According to the latest report from REOC San Antonio, the metro posted positive net absorption at 251,669 square feet during the third quarter of 2017. Industrial vacancy clocked in at 11.7 percent for the quarter, according to the report, which also cited nearly 1.5 million square feet of industrial space in the development pipeline.
Users are determined to meet consumer demand for a wide range of products, including everything from food and other basic daily needs to more specialized products. Demand also stems from industries thriving in the current economy, such as construction, auto manufacturing, housewares and everything connected to healthcare.
Warehouses have been forced to evolve by integrating newer forms of technology and providing building designs that allow for greater customization and segmentation. Older buildings have been upgraded to enable new technology and higher efficiency, making them better fits for users.
John Cannon, DH Realty Partners Inc.
The bottom line is that San Antonio’s industrial real estate market remains exceptionally tight and competitive. Users — particularly those with limited ability to compete for prime space, such as nonprofits — need access to an in-depth understanding of the local commercial real estate market to succeed.
Daily Bread
All of these market forces were put on display in San Antonio recently through an organization called Daily Bread. The Christian nonprofit has been providing food to San Antonio’s neediest population for more than 20 years. The company sought assistance in selling its warehouse headquarters facility on Rittiman Road on the city’s northeastern side.
Daily Bread bought the 170,000-square-foot warehouse out of foreclosure in 2012 for $2.5 million. Knowing it would not need the entire space, the company leased a portion of it to other users until its leaders determined the time was right to move to a more appropriate facility.
The Rittiman warehouse was aging, but had a new roof, 40-foot clear heights, a new sprinkler system, new roll-up doors, a new commercial kitchen, ample parking and 21 loading docks. The building drew an offer of $6 million from an all-cash buyer and is now occupied by ABC Supply Co. Inc.
A 90-day lease-back provision was negotiated to give Daily Bread time to find another facility. While the company needed a warehouse, it also required office space and a location closer to its ministry partners to expedite delivery of the food and other resources.
The company eventually settled on a 55,452 square-foot warehouse on Belgium Street, which was occupied at the time by Broussard Basics LLC. The facility, which sold for $4.3 million, met Daily Bread’s every need: Class A office space, an appropriately sized warehouse facility, a more convenient location to its ministry partners and high-tech finishes and security features.
Most importantly, the new location afforded Daily Bread the opportunity to dedicate more resources directly into the ministry, feeding tens of thousands of San Antonio’s most underserved population. The company also provided needed training for its ministry partners and other volunteers.
As e-commerce retail continues to expand, so too will demand for industrial space, particularly in population centers like Central Texas, the Interstate 35 corridor and Interstate 10 west to Seguin. Multiple large warehouse projects have come on line within the last several years in these areas to service e-commerce users.
As investors and brokers, it’s useful to see the broader landscape and the opportunities and challenges presented by this robust industrial market for nonprofits and other non-retail-oriented businesses.
With the overall vacancy rate tightening, industrial users will need to inform their brokers of the space requirements for their warehouses, and not just rely on real estate search engines to lead them to the right property. It’s a great problem to have because it means the market is booming in this category, but it will still entail significant challenges.
— By Michael D. Hoover, CMS, CEO, DH Realty Partners Inc., and John Cannon, President, CCIM, DH Realty Partners Inc. This article first appeared in the March 2018 issue of Texas Real Estate Business magazine.