Growing Demand for Smaller Industrial Properties Moderator: Lew Friedland, Colony Capital Panelists: Rene Circ, CoStar Portfolio Strategy Brian Fiumara, CBRE Andrew Mele, Trammell Crow Company #crec15 Moderator and Panelists Lewis Friedland Managing Director Colony Financial Inc. Brian Fiumara Senior Vice President CBRE, Inc. Rene Circ Director of Research- Industrial CoStar Portfolio Strategy Andrew Mele Principal Trammel Crow Company 2 NAIOP 215. Do not distribute or reproduce without permission. 1
Audience Take-aways 1. Discuss the increasing demand for light industrial product today 2. Understand the relatively limited amount of development activity within the asset type/class 3. Learn about how the current development activity is still well below the absorption levels 4. Analyze how construction costs for this asset class are rising 5. Understand how rents are still recovering but we expect them to be at past peak levels or higher in the near term" 3 Market Overview Rene Circ, Director of Research, CoStar Portfolio Strategy 4 NAIOP 215. Do not distribute or reproduce without permission. 2
Vacancy Below Pre-Recession Rates National Index Logistics & Light Industrial, 5K 25K SF, Vacancy And Demand, Supply Percentage Changes 12 1 8 6 4 2 (2) (4) (6) (8) Annual Change In Demand & Supply (Millions of SF) Vacancy & Vacancy Average 11% Current 1.2% Vacancy: 6.5% 1% 6% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 YTD Annual Rent Growth 1% 5.3% 5% 6.% 5.2% 4.6% 4.3% 5.4%.1% 1.5% 1.6%.6% 1.6% % (5%) (1%) -2.5% -1.5% -8.6% -5.4% -1.% 9% 8% 7% 5 This Is As Good As It Gets Light Industrial Cycle Chart By Quarter OCC RENT OCC RENT Austin Kansas City Jacksonville Houston Columbus OH Inland Empire Denver Northern New Jersey Oklahoma City Detroit Harrisburg Saint Louis Denver San Antonio Atlanta Memphis East Bay Seattle Reno Inland Empire New York Baltimore Kansas City Inland Empire Austin Orlando Minneapolis Richmond Houston Indianapolis Sacramento Seattle Jacksonville Cincinnati Atlanta Houston Columbus OH Dallas - Fort Worth OCC RENT Tampa OCC RENT Fort Lauderdale 6 NAIOP 215. Do not distribute or reproduce without permission. 3
Vacancy Will Still Fall For At Least A Year National Index Light Industrial/Manufacturing Fundamentals 88 78 68 58 48 38 28 18 8 (2) 1% 5% % (5%) (1%) Annual Change in Demand & Supply (MSF) Vacancy & Vacancy Average 7.3% 4.6% 4.5% Avg: 5.7% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 Annual Rent Growth 7.8% 5.7% 6.2% 6.1% 2.8% 3.2% 3.2% 3.8% 4.7% 3.3% 2.7% 1.8% 2.4% 1.7%.2% -.8% -.2% -1.% -4.6% -6.6% As of 15Q1 8% 7% 6% 5% 4% 3% 7 Many Markets Approaching Peak Occupancy Light Industrial Occupancy By Metro 98% 96% 94% 92% 9% 88% 86% 84% 82% 8% 78% 76% Occupancy Los Angeles Orange County Denver Harrisburg Inland Empire East Bay Cincinnati Houston Portland, OR Miami Seattle Salt Lake City Minneapolis Lehigh Valley Dallas - FW Edison Nashville Columbus OH Washington, DC Atlanta Chicago Orlando Northern NJ Indianapolis Tampa Baltimore Memphis Phoenix Prerecession Max/Recession Min Range Improved Y/Y Worsened Y/Y 19Q4 8 NAIOP 215. Do not distribute or reproduce without permission. 4
Rents To Reach New Peaks Light Industrial Asking Net Rents $12 $11 $1 $9 $8 $7 $6 $5 $4 $3 Rent Miami Los Angeles Inland Empire Washington, DC Phoenix East Bay Northern, NJ Orange County Seattle Portland, OR Orlando Atlanta Chicago Tampa Salt Lake City Cincinnati Lehigh Valley Baltimore Indianapolis Denver Harrisburg Minneapolis Dallas - Fort Worth Columbus OH Edison Nashville Memphis Houston Prerecession Max/Recession Min Range Improved Y/Y Worsened Y/Y 19Q4 9 There Is A Shortage Of Quality Vacant Space Vacant RBA In Industrial Stock 5K-25K SF Built Within 1 Years Vacant MSF In Industrial Buildings 5K-25K SF Built Within 1 Years 12 1 8 6 4 2 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 1 NAIOP 215. Do not distribute or reproduce without permission. 5
Current Vs. 24-6 Vacant SF Industrial 5K - 25K, <1 Years Old 5, Current Vacant SF (s) Houston 4, Chicago 3, Inland Empire Dallas - Fort Worth Phoenix 2, Baltimore Atlanta Northern NJ Seattle Austin Indianapolis 1, Los Angeles Philadelphia Detroit Denver 2, 4, 6, 8, 1, 24-6 Average Vacant SF (s) 11 Rents Starting To Justify Construction Logistics Rent & Supply Trends Net Completions (Millions SF) 3 25 2 15 1 5 2 18 16 14 12 1 8 6 4 2 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 Logistics 5K+ SF Logistics & Light Industrial 5K-25K SF Rent (Historical Trend: 1.1% Current Gap To Trend:.9%) Rent (Historical Trend:.% Current Gap To Trend: 1.8%) $6. $5.5 $5. $4.5 $4. $3.5 $3. $4.5 $4. $3.5 $3. $2.5 Rent ($/SF) 12 NAIOP 215. Do not distribute or reproduce without permission. 6
Increased Speculative Construction LOG & LIM 5k 25K SF RBA & Vacancies In National Index 1 9 Under Construction (Millions SF) Vacancy (%) 11% 8 27 32 MM SF 1% 7 6 23 24 21 9% 5 16 19 21 23 27 4 3 2 1 69 61 54 51 4 1 31 6 4 2 21 17 12 1 1 1 1 1 1 1 2 2 3 9 8 1 1 9 1 13 13 13 13 15 17 15 16 3 5 4 4 6 9 21 22 1 11 13 26 27 31 4 42 38 38 7Q3 7Q4 8Q1 8Q2 8Q3 8Q4 9Q1 9Q2 9Q3 9Q4 1Q1 1Q2 1Q3 1Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 Committed Available Vacancy 8% 7% 6.5% 6% 13 Limited Small Industrial Construction LOG/LIM Construction 5K - 25K SF Vs. Historical Norms 5 4 Average SF Under Construction As % Of Market RBA (MSF) & Spread Limited Development Supply Already Ramping Up 3 2 1 (1) (2) (3) Columbus Memphis Salt Lake City Northern NJ Cincinnati Nashville Tampa Denver New York Indianapolis Baltimore Portland Orlando Washington DC Phoenix Atlanta Los Angeles Inland Empire Chicago Lehigh Valley Orange County Miami East Bay Minneapolis Seattle Houston Dallas Last 4Q Average 22-27 Average Spread 14 NAIOP 215. Do not distribute or reproduce without permission. 7
It s Not A Guessing Game Anymore Vacant Logistics & Light Industrial Absorption, 5K 25K SF Number of Blocks 2 1 1 2 7 5 3 1 1 3 5 7 5-15K SF.8.4.5 15-25K SF...2 1.2 1.2.7.2.3.5.7.6.5.4.6.8.9 1.1 1.3 1.6 1.4 1.9 2.3.7 2.5 2.5 1.1 3.4 5. 4. 3. 2. 1.. 5. 4. 3. 2. 1.. Absorption Ratio Las Vegas Denver Detroit Edison Northern NJ Baltimore Salt Lake City Indianapolis Columbus Chicago Nashville Washington DC Austin Reno Minneapolis Vacant Existing Blocks (199+) Spaces Taken/Year (Last 5 Years) Available Blocks Under Construction Absorption Ratio 15 Nothing Is Cheap Logistics Pricing Vs Long Term Trend Net Completions (Millions SF) 3 25 2 15 1 5 2 18 16 14 12 1 8 6 4 2 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 Logistics 5K+ SF Logistics & Light Industrial 5K-25K SF Price (Historical Trend: 3.3% Current Gap To Trend: 12.8%) Price (Historical Trend: 4.8% Current Gap To Trend: 19.9%) $8 $7 $6 $5 $4 $3 $2 $73 $63 $53 $43 $33 $23 $13 $3 Price ($/SF) 16 NAIOP 215. Do not distribute or reproduce without permission. 8
Institutional Investment Never Stronger Industrial Sales Volume* $9 Sales Volume ($B) Sales Volume (Millions SF) 18 $8 16 $7 14 $6 $5 $5 $4 $3 12 1 8 6 $2 4 $1 2 $ 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 Total Sales Volume ($) LOG/LIM 5K-25K SF Sales Volume ($) SF Traded *Four-quarter rolling average. 17 Capital Markets Brian Fiumara, Senior VP, CBRE 18 NAIOP 215. Do not distribute or reproduce without permission. 9
National CLASS A INDUSTRIAL CAP RATES - Q3 215 19 National CLASS B INDUSTRIAL CAP RATES - Q3 215 2 NAIOP 215. Do not distribute or reproduce without permission. 1
Light Industrial CLASS A & B CAP RATES - Q3 215 21 Light Industrial Active Buyers 22 NAIOP 215. Do not distribute or reproduce without permission. 11
Light Industrial Developers 23 Development Andrew Mele, Principal, Trammell Crow Company 24 NAIOP 215. Do not distribute or reproduce without permission. 12
Big Box vs. Light Industrial Development Cost Comparison Cost Category Highlights Light Industrial Premium Land Market Dependent N/A Site Extremely Site Dependent 5 1% Shell Consistent, Predictable 15 2% Tenant Improvements Tenant Dependent, Higher Finishes for Light Industrial 6 9% Soft Costs Legal, Arch, Eng. Leasing Commissions, financing and Interest Carry 3 35% 25 Big Box vs. Light Industrial Development Cost Comparison Light Industrial 2, SF Big Box 7, SF Land $15. Site $12. Shell $26. Tenant Improvements* $7.5 Soft Costs $13.5 Total Costs $74. Yield on Cost 7.% Rent Required $5.18 $15. $11. $22. $4. $1. $62. 7.% $4.34 * - Estimated 5% office for Light Industrial, 2% for Big Box 26 NAIOP 215. Do not distribute or reproduce without permission. 13
Pros and Cons of Light Industrial Development Easier site selection Higher Leasing Velocity Smaller investments = less risk More inventory and more development competition Lower Credit Quality Same work and Less Profit Wider variety of users/leasing profiles 27 Same Work; Greater Profit Light Industrial 2, SF Big Box 7, SF Total Development Costs $74. In Place Rent $5.18 Exit Cap 5.25% Exit Price $98.67 Closing Costs (1%) ($.99) Profit/PSF $23.68 Total Dollar Profit $4,736, $62. $4.34 5.25% $82.67 ($.83) $19.84 $13,888, 28 NAIOP 215. Do not distribute or reproduce without permission. 14
DISCUSSION Make this session what you need it to be -- Ask the Question Please raise your hand and wait for the NAIOP Greater Toronto Volunteer to bring you a microphone. This session is being recorded. 29 Give Us Your Feedback! iphone or ipad Go to the session Agenda Details and tap the feedback bubble in the lower right of your screen. Android Go to the session Agenda Details and tap the thumbs up icon in the lower right of your screen. NAIOP 215. Do not distribute or reproduce without permission. 15
THANK YOU Please complete the survey on your app for this session now. 31 NAIOP 215. Do not distribute or reproduce without permission. 16