Industrial building rents are surging. Largest and fastest increases I’ve ever seen. We are almost at the point where rents and sale prices have doubled since the start of Covid. If rents were quoted daily, there would be the same large spikes you see in oil or wheat markets. Because industrial building market data is opaque, only those buyers (and brokers) most in tune with the industrial market read it accurately. Tenants are paying premium prices to obtain space under constrained conditions.
Premia is a new concept in the industrial building business. More people are familiar with its opposite, a discount. It’s typical to have several offers all above asking. Most people simply overbid, but financial managers weigh the premium. First, how much is the premium and then what is the risk. Large corporate tenants have been willing to pay between a 5% to 15% premium in anticipation of increasing rents and growing their business. One day again, when the cycle changes, discounts will appear, up to 50% at the extreme.
On the purchase side, while it appears that successful bidders are paying a premium, they are basing their price on realistic returns and surging rents. Many investors are willing to trade down to older and smaller buildings if they can reach return rates. While quality risk is to be avoided, many of these older manufacturing buildings served the L.A. region during the first Cold War and may see a return to their original use with upgraded automation and robotics.
Chaotic markets require a shifting perspective and an opportunistic mentality. Most developers and investors have the right instinct because they regularly compete for deals. Corporate tenants don’t initially have the motivation until they start losing a few deals to more aggressive parties. Once Occupiers personally experience the market through activity, they quickly learn the right premium to pay.