Presented at CREW Miami’s Luncheon Meeting, August 15, 2018
Moderator: Maria Juncadella, SIOR CCIM, Managing Principal, Fairchild Partners Commercial Real Estate Services. Panelists: Adam Vaisman, Director of Acquisitions, Butters Construction and Development; David Blount, VP, Development and Investment, Foundry Commercial; Stephanie Rodriguez, VP of Leasing, Duke Realty; Erin Byers, VP, Industrial Services, Colliers International South Florida
Industrial warehouse vacancies have reached a benchmark of below 5 percent nationally, with rental rates across South Florida heading for all-time highs. The strong market for warehouse facilities has given developers, investors, and brokers in Miami-Dade, Broward, and Palm Beach counties reason to build new product. The challenges and opportunities facing real estate professionals in this market sector, where needs and demands are constantly evolving and changing, was the panel’s focus.
FUTURE-PROOFING. Starting with a nod to historic business cycles, moderator Maria Juncadella of Fairchild Partners cited artefacts found at the Miami Circle, a 4,000-year-old dig at the mouth of the Miami River, that was likely area’s earliest trading hub. Back to the present, where warehouse vacancies are down 20 basis points, a major trend in warehouse design is future-proofing to provide for e-commerce. “To accommodate e-commerce heavyweights like Amazon and Target, developers are building facilities with clear heights of 36 feet, up from previous maximums of 32 feet,” said Stephanie Rodriguez of Duke Realty. To avoid losing future customers with needs yet to be discovered, some are extending clear heights (the usable space below obstructions such as joists, lights, or sprinklers) to 40 feet with indoor mezzanines or even multiple floors, a trend already strong in other parts of the US.
RATE STRUCTURES. In California’s Inland Empire, landlords with multi-level interiors are starting to charge for cubic space, although Juncadella confirmed that in South Florida, rates are still based on square footage. Rents in South Florida are at $9 per square foot per year (almost $12 industrial gross), and most activity is in new Class A product, Vaisman said. “In South Florida, cap rates are at historic lows, with a 5 percent return the best possible number investors can expect.”
LAST-MILE DELIVERY. A corollary to e-commerce is last-mile delivery, the movement of goods from a transportation hub to a final destination, typically a residence. Last-mile is big factor in urban core markets like New York City, and South Florida is the Southeast’s leader in last mile demand, said Adam Vaisman of Butters. Rodriguez noted that big e-commerce firms like Amazon need hundreds of parking spots for Uber and Lyft drivers, as well as overnight parking for large trailers. Acres of surface parking means increased land acquisition, a challenge in South Florida where the ocean and the Everglades are immovable barriers.
REVERSE LOGISTICS. Another effect of e-commerce is reverse logistics, the process of moving goods from individual consumers back to vendors. “Thirty percent of online orders are returned,” Byers said, ”and it can be cheaper for a firm to send the purchaser a replacement than to get the original item back. No warehouses filled with returned goods are in South Florida; those are mostly in the Midwest–Indiana, Illinois, Ohio–where land is cheaper and locations are more central.”
SPEED BAYS. To expedite handling and temporary (versus long-term) storage of fast-turnover goods, new warehouse designs include longer “speed bays” and wider space between columns. These changes minimize interference between merchandise intended for fast turnaround and that being stowed longer-term.
ROBOTS WELCOME. Increased use of sophisticated materials-handling equipment is another trend. David Blount of Foundry Commercial mentioned the Opa Locka warehouse his firm leased to Amazon, where forklifts are joined by robotic systems and augmented vehicles–those that are self-driving or driverless. Rodriguez noted that “A build-to-suit warehouse in Ohio includes dock-lock packages to safely secure self-driving trucks. Prologis is building interior ramps for small trucks.” Today’s ideal designs must have the versatility to accommodate second-generation warehouse tenants.
WHO’S USING THE SPACE? The region’s geography determines that most of the goods brought to South Florida’s warehouses are consumed locally. “As the gateway to Latin America, businesses here move goods arriving from Asia to Latin America,” said Byers, “but locally-based hotels, cruise lines, and construction tenants are our main markets.” Rodriguez clarified that consumer goods for local consumption are delivered and stored here but, because land in cheaper in Atlanta and that area is more central, that metro area is more favorable for national distribution. Asked whether ships using the enlarged Panama Canal have affected South Florida’s warehouse needs Blount said cargoes for broad US distribution are bypassing South Florida in favor of Savanna and other East Coast ports, because water transportation is cheaper than rail or truck.
SIZE MATTERS. The demand for 200,000-square-foot and larger facilities has doubled in the last ten years. Rodriguez said major tenants in Miami for 50,000- to 200,000-sq.ft. and up include providers of logistics for cruise lines and hospitality, and refrigerated space for the flower industry. (Refrigerated remains small and is nearly always build-to-suit, due highly-customized needs.) Broward County warehouse users are focused on mechanical support for trades like plumbing and flooring, while warehouses in Palm Beach mainly service home builders and residential suppliers.
Panelists said new Class A is the most active market, although Class B and C warehouses in the 1,000- to 5,000-sq-ft. range with 13-foot clear heights are being quickly absorbed. Vaisman said these users are a core market of local entrepreneurs who need low-cost space that doesn’t have to be beautiful.
IN CONCLUSION… As part of longer-term repositioning or redevelopment strategies, developers are looking at covered land plays, acquiring lumber yards and other properties with current cash flow. Even vacant parcels can come with zoning restrictions; entitlements, right of way, and environmental issues are considerations. With investors and their brokers all looking at same land, Vaisman said “to succeed you need good consultants to work you through the process, and sellers must have confidence in their teams.” It can take 18 months or longer to line up entitlements before construction can start, but he predicts that about 20 million square feet of industrial product will be built in South Florida in the next few years.