As the market changes, industrial property managers will have to work a little harder — and smarter — to keep their buildings full. Warehouses and other types of industrial buildings have been the darlings of commercial real estate investors for over a decade now, as strong market conditions and significant structural shifts drove tenant demand to record levels. Most notably, a huge share of shopping moved from physical retailing to e-commerce, requiring more warehouses (and fewer stores). At the same time, developers could not add new supply fast enough to keep pace, fueling historically high occupancy and rent.
However, managing industrial properties has been getting more complicated lately. The primary reason: softening market conditions, as much-needed new supply is coming to market just as demand is declining. Real estate brokerage firm JLL reports that U.S. tenant demand for industrial space in the first half of 2024 was less than half that recorded in the first half of 2023. Meanwhile, developers delivered an unprecedented amount of space to the market last year, most of it vacant. Plus, the construction pipeline is still significantly elevated, meaning more supply will be added this year and next, further dampening market conditions.
While national occupancy rates are still quite healthy compared to historical levels and conditions in other commercial property sectors, vacancies are rising in many geographic markets across the country. This means property managers must get more creative, marketing and managing their buildings more aggressively than they have in many years.
Tenants Are More Selective
The increase in vacant space may be painful to many owners but represents an opportunity for tenants to upgrade their facilities. With space so tight in recent years, industrial tenants were often forced to take whatever they could find. And much of the available space was often dated and substandard, with low ceilings, inadequate power access, and inferior ventilation.
With so much more space available now — much of it constructed in the last few years and superior to earlier generations of warehouses — tenants can leverage the weaker market conditions to find better and more modern workplaces. And even in markets where vacancies are still low, the addition of so much new space due to recent construction enables tenants to find better workplaces.
“War for Talent” Drives “Flight to Quality”
The availability of more modern industrial space provides the opportunity for tenants to upgrade. But what is the motivation for firms to make a change? Top of mind is the “war for talent.” Labor markets have been incredibly tight since the pandemic, so firms must battle for coveted employees. What can they do? Certainly, paying competitive wages is a given. But, firms increasingly realize that the workplace itself can be an important differentiator as workers conduct their own “flight to quality,” seeking better pay, better positions, and better working environments. Logistics firms and other warehouse tenants can more easily attract new workers and retain existing ones by upgrading their facilities.
This trend is more established in the office sector, where the virtually overnight shift to remote and hybrid work arrangements during the pandemic decimated the overall demand for office space. Professional service firms, financial institutions, and other office occupants quickly realized they must provide better workspaces to induce their workers to come into the office, as discussed in a previous blog. As a result, they’re looking for newer buildings in accessible locations offering first-class amenities and services and functional layouts. Importantly, these buildings are viewed as providing healthier, more productive space.
Now, we’re starting to see those same moves in the industrial property sector. Modern warehouses frequently offer amenities like comfortable locker rooms, upgraded kitchen facilities, and attractive outdoor spaces to attract and retain workers. These amenities create a more appealing work environment and contribute to employee satisfaction.
Also critical is that newer warehouses are viewed as healthier, providing superior ventilation systems and more direct natural light. Modern warehouses also tend to be more productive, accommodating advanced technology, such as automation systems and robotics. Many of these improvements are built and paid for by the tenants, particularly in net-leased buildings. Still, the facility must have the appropriate infrastructure to support these improvements, which usually means a high-quality modern building with features such as high clear ceiling heights, high energy efficiency and other sustainable features, and access to the vast amounts of electricity needed to power robotic systems.
Surveys Are Essential for Understanding Tenant Needs and Prioritizing Investments
Managers of industrial buildings can capture essential insights from surveying their tenants, tenant surveys can be especially important for warehouses because most are net-leased, and property management generally is rarely on site and has limited direct contact with the tenant. But capturing feedback from industrial tenants is vital, especially given the high cost of tenant turnover. If property managers can gain an understanding of tenants’ needs and renewal intentions, they can make changes before it’s too late.
Surveys serve as an early warning system for potential tenant concerns, enabling proactive issue resolution. They are a critical tool for determining what investments make sense and will be desirable to target tenants. Property owners may need to upgrade their facilities to better compete in the new market dynamics — or risk losing tenants who decide to “flee to quality.”
Contact Grace Hill today to learn more about our tenant survey solutions.
