August 01, 2019
Demand for well-located industrial real estate in densely populated markets has never been higher. The fierce push by e-commerce firms for logistics space close to consumers has continued to grow as customers expect fast delivery. This demand has exposed challenges to building new infill space.
Commercial real estate developers are looking to meet the pent-up demand for infill facilities. However, they have found that much of the industrial real estate market's low-hanging fruit has already been picked. The lack of sites ready for development makes new projects in mature markets more difficult, time-consuming and costly due to several factors:
Rehab restrictions. The main challenge with building infill projects is from the need to obtain clear land through one of two ways. For an existing property, developers must first remove the present structures. For an undeveloped site, they must correct the conditions that prevented its development in the first place. In either case, the developer may need to address environmental concerns, which could take up to 10 years.
Bidding battles. Industrial real estate builders are not the only buyers looking for infill sites. They have to compete with office, multifamily or mixed-use buyers for the same location. These bidding wars can drive up the price of a site enough that it is no longer economical.
Dated designs. Even when a building doesn’t need to be torn down, the developer may still need to make drastic changes to meet the needs of today's tenants. This could include removing portions of the building, raising the ceiling height, and adding loading docks.
Cost control. Infill real estate is typically more costly to build than most other industrial projects. To recoup building costs, rent for infill real estate can be 40% higher than less-desirable space. However, the higher rent doesn’t seem to faze tenants. Well-located projects are being leased up rapidly, with many leasing before the space is completed.
Despite the challenges to building new infill real estate, developers are getting creative to execute projects. For instance, TDC bought a golf course in Florida to convert it to last-mile logistics space. When finished, the project will provide as much as 1 million square feet of industrial space. The project caters to e-commerce firms with 36-foot clear heights, large truck courts and access to 19 million consumers within a two-hour drive.
Industrial users will pay premium rent for highly efficient projects that make delivery to customers faster. And, it seems, they are willing to wait for new projects to meet those needs rather than settle for sub-par space or remote locations. This will only continue as retailers make e-commerce a larger part of their sales strategies.
While infill construction can present unique issues, savvy developers continuously unearth exciting opportunities. In high-density markets where land is in short supply, a little patience and creativity can go a long way.
Brian Banaszynski is a Partner at Transwestern Development Company in the Logistics Group. He leads the Northeastern US Industrial development business for TDC