Ask Miami industrial park developer Ernesto Cambo what he sees as the overarching trends in South Florida industrial real estate, and he’ll tell a story where “pressure” is a key term: “Land pressure. Demand pressure. Institutional pressure.”
Cambo, a principal whose company, Investment Group LLC, is developing 178 acres west of Opa-locka Executive Airport as an industrial megapark, was not alone in using that word. Brokers, leasing agents and developers interviewed by the Daily Business Review all agree the South Florida industrial market is facing a squeeze—in a good way for supply siders—as demand from the growing international trade and logistics sector pushes against the potential for long-term scarcity of industrial infrastructure.
“There’s no land left in Broward,” Cambo said. “If you look at the development map for the UDB (urban development boundary) in Miami-Dade, we’re there at the water line. Whatever is added won’t be moving the needle.”
It’s not just a land issue. Institutional investors are bullish on Miami-Dade and southern Broward counties as industrial centers. That dynamic is in turn making industrial landlords optimistic about the future.
“There’s no shortage of bidders,” said industrial real estate specialist Steven Medwin, the South Florida managing director of national broker JLL, formerly Jones Lang LaSalle. “There’s such a demand from institutional investors that they’ll bid up almost any product.”
Pressure, of course, always has some natural outlets.
In the case of the industrial market, new construction has boomed after the complete collapse of that activity from 2009 through 2011. A total of 538,452 square feet of new industrial space was delivered in Miami-Dade during 2012, and 2.4 million square feet was added in 2013, according to statistics compiled by Edward Redlich of ComReal Miami Inc.
Experts told the DBR the amount of industrial space likely to come online in Miami-Dade this year ranges from 1 million to 1.4 million square feet. Total supply in the county is less than 180 million square feet, according to the Commercial Industrial Association of South Florida. Others put that figure closer to 200 million.
“In the very short term, that’s a pretty fair amount of space added to our supply,” said Wayne Schuchts, principal with broker Avison Young, predicting an uptick of half to a full percent on vacancy rates in the near future. But whatever slack that increase might cause will be temporary, Schuchts said. He noted the market remains “very favorable for developers.”
Slow Rent Rebound
The bullishness of the industrial specialists depends on one factor that is still not fully evident—rent increases. While sales prices for industrial property are approaching records, rents have not rebounded as quickly from the Great Recession.
“Sales prices of existing buildings [are] not supported by rental rates,” the 2014 CIASF Industrial Market Report released in January bluntly stated.
Ed Easton, founder and chairman of the Easton Group brokerage, also believes that if those rates were to stay the same, they wouldn’t justify the type of new construction on the drawing board.
“If you buy land and develop the buildings, you’re in for $140 per square foot,” he said. “And today you’re getting $6.50 per square foot (triple net rent) in some markets. Something’s gonna give—either the cost of construction comes down or the rent goes up. It’s not going to be the construction costs.”
Easton is so certain rents will rise, he said, “I don’t know that there’s enough supply being built.”
Indeed, other industrial market experts expressed the same sentiment, noting new space is attracting a lot of interest.
“We are seeing a lot of tenants occupying spaces that are over 40,000 square feet, and they’re looking for new facilities that have modern specifications: ceiling height, lighting, office space frontage,” said George Pino, president of State Street Realty. “You’re seeing a flight to quality continue.”
That flight, a trend that has been going on since Class A landlords slashed prices at the beginning of the recession, is causing one of the main value opportunities in the market, brokers noted.
“The Class C product is going to have a much tougher time going forward,” said Greg Milopoulos, a broker with Fort Lauderdale-based Berger Commercial Realty. “The Class C product is owned by much smaller landlords, who don’t necessarily want or have the resources to improve on it. What happens is people are now going around and touring other property and seeing they can get much better space for not that much more, even as rates are going back up on your class A product.”
Upside In Market
Still, the market appears to have many more potential winners than losers. Milopoulos, who focuses on Broward County but does deals across South Florida, said one way landlords are extracting a big rent premium is by providing built-to-suit spaces with large office components.
Some smaller companies might find it more sensible to pay top dollar for an office build-out inside an industrial park than to separate their office and warehouse operations in different locales. To that effect, “the guys that have 20 percent or more in a property set up as office are going to have a much easier time leasing than those with 5 or 10 percent,” Milopoulos said.
In recent deals he’s seen, landlords offering large office build-outs charge $11.50 to $13 gross rates per square foot, while those with smaller office options are getting closer to $10 gross per square foot. Warehouse space alone averages $9.50 per square foot gross in the southern Broward County industrial corridor, he said.
Milopoulos also sees some opportunity in Palm Beach County, where enterprising companies might take the risk of being farther from major distribution hubs if the price is right. Current rates there can be as low as $7 gross per square foot.
“Downtown West Palm Beach is expanding,” he said. “People are going to Palm Beach because they see opportunity there. Product is available, rental rates aren’t crazy, landlords are aggressive in pricing, so why not take that next leap and see if we can get a distribution center in Palm Beach?”
More and more companies might be asking themselves the same question if the much-heralded expansion of PortMiami and Port Everglades end up delivering big upticks in industrial traffic, as some have suggested could happen in the most optimistic of scenarios.
PortMiami is undergoing a $180 million expansion to accommodate the larger cargo ships that will dock in South Florida once the Panama Canal is expanded, although the projected 2015 completion date is uncertain. Port Everglades in Fort Lauderdale has been going back and forth on a $313 million dredging project also meant to accommodate traffic by titanic post-Panamax cargo ships.
But even if the rosiest calculations of the effects those port projects could have in the local industrial scenario turn out to be overblown, “it’s not like we have to depend on it anyway,” said Jose Juncadella, principal at Coral Gables-based Fairchild Partners Inc.
“Our market is active,” he said. “Our market is considered a tier 1 city for industrial. You put an institutional type of property on the market right now, and you have 16 bidders for it. No matter what, there’s huge demand for Miami.”