More than 11.5 million square feet of industrial space in South Florida was leased in 2017, pushing down vacancy rates and strengthening the industrial real estate market.
The industrial sector has been profiting from a favorable tip in the supply-and-demand balance. The upswing in the economy and employment and the growth of e-commerce are upping demand, and new construction isn’t keeping up, according to studies and interviews with market experts.
“The demand is exceeding the supply because one, there wasn’t much new product built in the last 10 years. During the Great Recession, people were not going to build warehouses just on spec. Two, you have the concept where consumers are expecting one-, two-, three-day deliveries, even next-day deliveries. That requires storage space to fulfill those orders,” said attorney Barry Lapides, a partner with Berger Singerman in Miami. “And three, you have an improving economy, where you have not just the big national and international businesses seeking industrial space, but you have the local businesses that require it.”
Some of the locals are retailers, said Edward Easton Sr., founder of commercial real estate brokerage, development and management firm Easton Group Cos. Inc. in Miami.
With higher rents for stores, retailers hold some of their products in nearby warehouses to significantly reduce their store square footage — and in turn their total rent, said Easton, who also is chairman and chief executive officer of Easton Group.
“Instead of having to use 10,000 square feet at $50 a foot in the shopping center or the mall, you use 5,000 square feet and you use the other 5,000 square feet at $7 a foot in the warehouse,” he said. A customer comes in the store, picks an item and, “You say, ‘I don’t have it here but I have it in a warehouse, and I could have it shipped to you in an hour.’ ”
Last year was a record in many respects for industrial real estate.
More than 7 million square feet was leased in Miami-Dade County — the best year since 2011, according to a Cushman & Wakefield 2017 market reports. In Broward County, leasing hit more than 2.9 million square feet for warehouse distribution space, and in Palm Beach County, about 1.6 million square feet was leased.
The company also reported seeing other records in each county.
Miami-Dade finished the year with a 4.7 percent vacancy rate, which was less than the five-year average.
In Broward, the direct vacancy rate dropped to 2.8 percent — the lowest in 10 years. Asking rents for industrial space rose to $9.41 per square foot for a 10-year high.
In Palm Beach, warehouse and distribution center availability was down to 3.1 percent — a historic low. And the vacancy rate went down to 2.7 percent, the lowest in this real estate cycle.
The market is expected to remain strong, and Miami-Dade rents are expected to rise even with new supply coming online and temporarily pushing up vacancies, according to Cushman & Wakefield.
BIG AND SMALL
Global logistics provider DHL in late 2017 renewed its 100,000-square-foot lease at 8400 NW 25th St. in Doral’s Beacon Centre, an industrial and business park west of Miami International Airport in the Airport West submarket.
In the same submarket, Terreno Realty Corp. paid $8.4 million for a 99,603-square-foot industrial space at 1775 NW 70th Ave., in October 2017. That works out to $84 per square foot.
Indeed, the Airport West area is now the biggest industrial center in Miami-Dade, according to Jose Juncadella, co-founder, principal and broker for commercial real estate agency Fairchild Partners Inc. in Coral Gables.
“It has close to 60 million square feet of industrial space. Then the Medley and Hialeah markets (are next) with about 40 million square feet,” he said.
Broward, too, netted some notable deals in recent months.
TH Real Estate in September paid $54 million for industrial properties at 15712 SW 41st St. in Davie and 6001 and 5607 N. Hiatus Road and 10601 State St. in Tamarac.
The old adage “location, location, location” seems to apply just as much to industrial as it does to other asset classes.
There’s a need for sprawling industrial complexes in western areas and smaller industrial space closer to population centers, such as east of Interstate 95, for the last-mile delivery.
“Those distribution centers want to be located close to the population centers,” Juncadella said.
Lapides echoed that.
“Being close to the airport is important. Being close to the huge office parks near the Everglades is important because that serves a purpose,” he said. “But you can’t have one-hour delivery when the refrigerator industrial warehouse is in northwest Miami-Dade and someone wants their product in Kendall and they requested it at 4 o’clock in the afternoon, or they want it in Brickell.”
The healthy demand for industrial space coupled with the limited new supply are expected to have several effects on the market.
For one, rents could increase. And industrial developers are building high-tech buildings that can store more goods.
Not only is land for industrial space in Miami-Dade limited, it also is expensive, Easton said.
“The cost of buying the land and building is like $160 a foot. And you are renting this stuff for like $7 a foot, which is like a 4.8 percent return or so,” he said. “The economics don’t justify a lot of speculation, which leads me to believe that rents are going to have to go up. And I think they will.”
Overall, about 25 million square feet of land in Miami-Dade is potentially buildable for industrial space, according to Easton.
“If you are absorbing about 3 million feet a year, that’s not rocket science to for you to figure you’ve got about eight years’ worth of land left,” Easton said.
To deal with the tightening supply, new industrial space must use technology to make the storage space more useful.
Take for example the 72-acre Beacon Logistics Park that is ready to build 1.3 million square feet of space at 9100 W. 40th Ave. in Hialeah.
Construction is expected to begin this summer with the first building to be finished in the second quarter 2019, according to Sebastian Juncadella, adviser at Fairchild Partners in Coral Gables and Jose Juncadella’s son. Fairchild Partners represents the owner-developer Codina Partners LLC.
The development’s design, including 32-foot high ceilings and high columns, was done in a way to maximize the storage capacity for tenants, Sebastian Juncadella said.
“You need to keep up with the growth (in Miami) and as a result the users … (are) going into higher-tech buildings,” he said, citing growing population and the growing traffic through PortMiami.
Another way to deal with an unquenchable industrial demand is to copy success in other major cities with land limitations. One option is adding more stories to existing industrial buildings, which generally are single-story structures.
“People are very innovative and they come up with two-story warehouses and three-story warehouses. We are not at that point yet. They are doing some of that in Seattle and Europe and in places where there’s scarcity of land,” Easton said.
This much is clear: Industrial real estate will continue to perform well in the coming year.
“The industrial tenants are finding a tougher and tougher time finding a space to lease,” Sebastian Juncadella said. “On top of the tenants that are in the market already, there’s been a move into Miami either from out of the state or from Broward.”