Just like people with great potential, promising commercial real estate projects can face impediments to success. Even though demand for commercial space has been surging across certain sectors, especially industrial and multifamily, roadblocks are compromising building projects. Industrial projects are stagnating—either stalling or not starting at all—partly because of supply chain constraints. The key to pushing through and building new commercial stock lies in creativity, flexibility, and boldness, say industry experts.
Get Creative with Materials Delays
Industrial real estate is in an enviable position. For the first quarter of 2022, industrial absorption was at a 10-year high, industrial supply and availability were at 10-year lows, and industrial asking rents had risen a record-high 10.6% year over year, former National Association of REALTORS® economist Brandon Hardin said at the association's Real Estate Forecast Summit in late March.
Yet, industrial building projects are facing significant issues with materials, says Gabriel Silverstein, SIOR, managing director of SVN Angelic in Austin, Texas. When a project has to wait 56 weeks for roof trusses, the delay profoundly affects the construction of an industrial facility that usually builds in 40 weeks, he explains. “You can’t build 90% of a building; you need walls, electrical, nails, bolts.”
When essential materials are missing, it’s time to investigate alternatives, Silverstein adds. For example, glulam beams—layers of wood laminations bonded together with industrial adhesives—can replace steel or solid sawn lumber in some circumstances. The material can work in large, flat roof systems and complex arches, and is also faster and cheaper to produce. “You have to challenge yourself by asking, ‘How can I create the same result with different techniques?’” he says.
Network for Innovative Ideas
New contractors and suppliers—and even competitors—can be another source of ideas to work around supply issues. Silverstein recommends networking to find out what’s working and who’s innovating. Recently, a client of Silverstein’s faced a major materials problem on an office project: a lack of floor trusses. So, Silverstein reached out to Prologis, a REIT company and developer in Dallas. Prologis referred him to a midsized contractor who had found high-quality floor trusses manufactured in less time than usual from a new source in Mexico.
The contractor went to Mexico to check the quality, X-rayed every truss for the project, and didn’t discover any issues. Silverstein’s client was delighted with the result. “The client in this case had a structural steel problem and didn’t know how to fix it. [The contractor] came up with a brilliant solution.”
New ideas don’t always come from new sources. Problem solving with an established team of colleagues and collaborators is a source of innovation you may overlook. Current employees, vendors, suppliers, contractors, and development partners can offer ingenuity. “Go back to the team and challenge them,” advises Silverstein. “Say, ‘Somebody moved the ball on us. Let’s figure out a way to do something differently.’”
Overcoming Land and Zoning Issues
Geographic and zoning issues make new industrial construction challenging, says Baktash Kasraei, SIOR, vice president of JLL Industrial in Vancouver, British Columbia. He notes that with a vacancy rate of 0.5% in his market, stock is essentially sold out. “What is available is either obsolete or bought quickly. New-gen buildings are typically leased before completion.”
Although not every region has Vancouver’s geographic issues with mountains and coastline, many struggle with restrictive zoning.
One way to maximize site usage is to build higher. “Developers are now offering 40-foot clear heights on spec, when 32 was the norm,” says Kasraei. Design and layout can also be altered to accommodate automated conveyor and stock management systems and driverless vehicles. With less human intervention necessary, more stock can be stored vertically.
Kasraei also recommends casting a wider net when searching for space to build. Recently, developers have begun constructing new satellite distribution facilities in areas like Kansas City, St. Louis, and Nashville rather than in traditional hubs like Chicago, Dallas-Fort Worth, New Jersey, and Southern California. Box trucks and commercial vans, rather than tractor trailers, are used to transport goods the “last mile” to stores and customers.
“The client had a structural steel problem and didn’t know how to fix it. [The contractor] came up with a brilliant solution.” – Gabriel Silverstein, SIOR
Kasraei notes that this “new” model was once known as “hub and spoke” and used to be the rule rather than the exception—a testament to the cyclical nature of commercial trends. But he also points out that this approach can become a balancing act. “When you use smaller vehicles, it drives labor costs up,” he says. “One driver can become three or four. It’s an approach that won’t work for all.”
High demand for warehouse space is likely to continue, as e-commerce remains strong and traditional retailers move to stockpile wares. “Retailers are looking to build up safety stock,” says NAR’s Hardin. “They’re moving from ‘just in time’ to ‘just in case.’”
Kasraei advises clients looking to lease space in this environment to be flexible—and aggressive. Multiple offers are typical, and clients need to move quickly on desirable properties. In addition, Kasraei recommends clients make thoughtful decisions about space. “Before, people would routinely take extra space. Now you have to maximize and fully utilize space so there’s no wastage.”
For buyers, Kasraei recommends the same—flexibility and boldness in decision-making—and doing your homework. “You have to have financing and do your due diligence up front, because the market is just so competitive.”
Repurposing for Multifamily, Industrial
Demand in the apartment sector is also accelerating. NAR Chief Economist Lawrence Yun reports that as of March, net absorption was up, vacancy rates had declined to a 10- year low of 5%, and rental asking rates were up 11.1% year over year, an industry high. With the median sales price of an existing home rising to an all-time high of $375,000 in March, consumers are clamoring for affordable multifamily housing.
One way to meet the demand, despite supply chain issues, is to repurpose existing vacant buildings. “Malls, hotels, even unused schools can potentially be converted to housing,” said Bryan Greene, NAR vice president of policy advocacy, at a webinar hosted by national think tank Third Way. He added that NAR supports federal tax credits to attract investment in conversions.
Kasraei notes a recent trend toward converting suburban office parks to industrial space, adding that this too is cyclical. Many current suburban office sites used to be industrial, he says.
Vacant office space is certainly available for conversion. NAR research shows that as of February 2022, 21% of managers and professional workers continued to work from home, much higher than the 9% who did so before the pandemic. And that percent doesn’t factor in workers following a hybrid model. Office vacancy rates as of March 2022 remained at an industry high of 12.3%.
So, what does this mean for the hard-pressed office sector? Is there still room for creativity and development? Silverstein remains optimistic. “Nothing can replace the spontaneity and creativity of the unstructured interactions you have over time in an office.” For those with vision, he adds, “this is a time that creates opportunity.”