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Midsize tenants are driving the demand for industrial space in metropolitan areas. As a result, their needs shape the direction of and development within the industry.
Major Markets for Midsize Tenants
Midsize industrial tenants occupy space from 50,000-sq.-ft. to 300,000-sq.-ft. Yardi client and real estate services firm Avison Young lists key markets for midsize tenants as Indianapolis, Chicago, Dallas and Atlanta.
Between January 2017 to June 2019, Chicago tenants signed 872 industrial leases averaging about 111,629 sq. ft. In the same timeframe, Atlanta tenants signed 320 industrial leases with an average size of 113,243 sq. ft. Similarly, the average space for tenants in Dallas is recorded as 107,265 sq. ft. Indianapolis has offered some of the largest parcels with industrial tenants signing 41 leases averaging about 146,341 sq. ft.
“Indianapolis’s stability, low cost of doing business, and central location are attractive to distribution tenants and investors alike,” explained Sean McHale, principal at Avison Young’s Indianapolis office in an interview with NREI. “We expect that rental rates will remain steady or rise slowly and cap rates will compress well into 2019.”
Making Room for Last Mile Delivery
Midsize boxes are in high demand due to an increased need for last mile delivery sites. The price for such spaces has increased from $59.56 per sq. ft. in June 2017 to $68.71 per sq. ft. in June 2019.
“I think we are going to continue to see a focus on overlooked infill sites being repurposed to meet the needs of last mile logistic tenants,” reports Chris Nebenzahl, operations manager for Yardi Matrix. “These could be vacant retail centers and big box stores or outdated back office buildings.”
He adds, “Last mile and ecommerce tenants are here to stay and getting much of the attention, but I wouldn’t ignore the value of quality, more traditional mid-sized industrial tenants being drawn to class B buildings.”
Multistory industrial infill has also increased in popularity in order to meet the growing demand for last mile logistics. New ground up development is expected in densely populated urban areas including Seattle, San Francisco, Chicago and Los Angeles.
Changing Demand, Changing Spaces
High costs in the existing marketplace have encouraged many leading firms to turn to industrial development instead of acquisition, notes McHale. These new spaces have a few common characteristics.
“In cities with more available land, we continue to see new industrial buildings pushing clear heights to as much as 40’ and also LEED certification and an emphasis on flexible space,” says Nebenzahl. “Improved physical appearance and aesthetics are being emphasized, this includes upgraded common areas, a focus on natural lighting, modern landscaping and even recreational space for workers.”
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