Behind the Wheel: Drivers of Development Cycles

Transcription

1 Behind the Wheel: Drivers of Development Cycles Moderator: Michael P. Murphy, CenterPoint Properties Panelists: Don Chase, KTR Capital Partners Don Hansen, W.W. Grainger, Inc. Mark S. Hugeback, Mitchell and Hugeback Architects, Inc. Al Pontius, Marcus & Millichap Investment Services Please silence all cell phones. This session is being recorded. Session Objectives Industrial development is back in full swing, but many aspects of this development cycle vary significantly from the past. This session will explore where and how development is occurring, and what are the driving factors, including: Intermodal E-commerce and technology Spec, built-to-suit and industrial design demands Trucking challenges and fuel costs 2 NAIOP Do not duplicate or reproduce without written permission. 1

2 Michael P. Murphy CenterPoint Properties Chief Development Officer responsible for conventional and complex development activity 27 years commercial/industrial real estate experience Past President of Chicago NAIOP Chapter, Lake County Partners Member of NAIOP, SIOR, AIRE Holds Bachelors in Economics from Boston College and MBA from Northwestern University s Kellogg School of Management 3 CenterPoint Properties NAIOP Do not duplicate or reproduce without written permission. 2

3 Don Chase: Trends in Industrial Development State of the Market: Supply & Demand Development Challenges: Costs Built-to-Suit Spec Development 5 Don Chase KTR Capital Partners Heads development for KTR and member of Investment Committee Over 20 years of experience in industrial real estate Developed over 20M SF of industrial property KTR current development pipeline: 5.2M SF Under construction 5.1M SF in pre-development KTR Capital Partners is a real estate investment, development and operating company focused exclusively on the industrial property sector. Headquartered in New York City with offices in Philadelphia, Chicago, Dallas, Las Vegas, Los Angeles, Miami and Seattle, KTR has a 75 person platform that manages a series of discretionary value-add investment funds that target opportunities throughout major markets in North America. KTR funds currently own a portfolio of approximately 60 million square feet across North America and provide nearly $7.0 billion of investment capacity. For additional information, please visit 6 NAIOP Do not duplicate or reproduce without written permission. 3

4 State of the Market Supply & Demand Where are we now? Last 4 years from the bottom to the top? Year MSF PPR 54* Supply 26M 29M 42M 74M Demand 38M 110M 121M 160M Vacancy 10.2% 9.3% 8.4% 7.5% *54 Largest US Industrial Markets as tracked by PPR (Source: PPR 1Q 2014 Report) Peak Supply Trough Supply Peak Demand Trough Demand 2009 (90) Peak Vacancy Q % Trough Vacancy % 7 State of the Market (cont.) Forecast (5 years) Average supply 167M (peak 16 & 17; ±190M) Average demand 153M (peak 15; 165M) Commentary from 1Q 2014 PPR Report Pipeline is running on half empty Last time vacancy was below current level was 2001 Large buildings dominated-600bp recovery for larger buildings over 500k SF Q413 absorption of 53M SF was 3 rd highest on record Retailers, Logistics & E-Commerce Drive Demand So it all feels great, right (Source: PPR 1Q 2014 Report) 8 NAIOP Do not duplicate or reproduce without written permission. 4

5 Development Challenges but there are challenges in general: Land costs: Priced to Perfection Entitlements, Environmental, Engineering Construction costs rising Get Serious Commodity pricing increases Capacity constraints Yields dropping Top tier markets are ultra competitive (but activity is good) More companies looking to buy vs. lease (less opportunity for profit?) Development Challenges (cont.) Build-to-Suit Future expansion requirements are prevalent Specialized features add costs and complicate approvals Restoration clause is important Making the right bet (Credit) Squeezed margins Purchase options and ROFR complicate sale opportunity Spec Development Smaller scale multi tenant projects are currently under served Demand is good in most markets Marginal increased efficiencies for the most part for tenants How do you predict rent growth; rents above peak? Sticker shock for tenants? Competing uses for land sites again Deteriorating efficiencies in coverage due to regulations 10 NAIOP Do not duplicate or reproduce without written permission. 5

6 Don Hansen: Client Perspective of Real Estate Evolution Grainger Global Facts vs. U.S. Facts Changes Over Past Five Years Company Progress Outlook 11 Don Hansen W.W. Grainger, Inc. Director of Real Estate and Development Currently responsible for all transaction and development activities associated with a 27M SF portfolio 30 years commercial real estate experience Holds Bachelors in Accountancy and MBA in Finance from DePaul University in Chicago 12 NAIOP Do not duplicate or reproduce without written permission. 6

7 Grainger Global Facts 2013 sales exceeded $9B More than 1.2M products stocked 709 branches 33 DCs 24,000 team members E-commerce represented 33% of 2013 sales 15 th largest e-retailer in U.S. and Canada 13 Grainger US Facts 15,000 team members 574,000 SKUs in our catalog Approximately 400 U.S. branches 18 DCs Contact centers provide customer support More than 3,000 sales reps 14 NAIOP Do not duplicate or reproduce without written permission. 7

8 Changes over last five years Overall sales increased from $6.2B to $9B E-commerce sales increased from $1.5B to $3.0B E-commerce sales have increased from 15% of sales to 33% Product lines have more than quadrupled in the U.S. and Canada SKUs in the U.S. catalog increased from 230,000 to 574,000 Employment has grown from 18,000 to 24, branches to DCs to 33 DCs 15 Mark Hugeback: Industrial Development in 2014 Site Size & Flexibility Parking & Security Trailers & Sustainability Technology & Material Handling Investment Spec Design for Built-to-Suit Development 16 NAIOP Do not duplicate or reproduce without written permission. 8

9 Mark Hugeback M+H Architects Principal with M+H Architects Over 34 years of experience Licensed in 37 states Completed over 45M SF of warehouse/distribution facility projects Nationwide client base 17 Site Size & Flexibility Bigger Footprints = Bigger Sites Expansion capability Potential for campus environment Site Flexibility Can your site adapt to a variety of requirements? 18 NAIOP Do not duplicate or reproduce without written permission. 9

10 Parking & Security Car Parking E-commerce & customer responsiveness increase employee count 1 space/5,000 SF of warehouse space transitions to 1 space/2,000 SF or lower in some cases Security/Queuing Single point of traffic management Incoming delivery peaks 19 Trailers & Sustainability Trailer Parking Transitioning from 1 to 1 relationship to dock door position to 2 or 3 to 1 Sustainability Higher priority; economically driven Green aspects of projects 20 NAIOP Do not duplicate or reproduce without written permission. 10

11 Technology & Material Handling Investment Focus on enhancing worker productivity Automated and lean processes implemented in various degrees Moving from floor to racked storage Increasing density of rack with VNA equipment, ASRS, & robotics E-Commerce impact Large number of small orders Expanded area of multi-level pick modules; code impact 21 Spec Design for BTS Development Design Element Clear Height Bay Size Speed Bays Specification 36 with 45 BMD unless BTS dictates 52 standard may give way to for increased flexibility 60 being pushed to 70 in some markets Building Depth Dock Door Quantities Dock Door Packages 1 per 7,500 sf - 1 per 4,500 sf Levelers, locks, & seals sometimes deferred 22 NAIOP Do not duplicate or reproduce without written permission. 11

12 Al Pontius: Market Trends Effecting Industrial Real Estate Single-Tenant Industrial Cap Rate Trends Average Cap Rates vs. 10-Year Treasury U.S. Single-Tenant Industrial Buyer Composition National Industrial Rank by Metro and 5-Year Transaction Activity 23 Al Pontius Marcus & Millichap Investment Services Senior vice president at Marcus & Millichap Real Estate Investment Services, based in the San Francisco office Responsible for all of the leased investment divisions Developed his career for 30 years with Marcus & Millichap Holds a bachelor s degree in marketing from San Francisco State University 24 NAIOP Do not duplicate or reproduce without written permission. 12

13 Single-Tenant Industrial Cap Rate Trends 2013 to 1Q $5M+ 25 Single-Tenant Industrial Cap Rate Trends Average Cap Rates vs. 10-Year Treasury 26 NAIOP Do not duplicate or reproduce without written permission. 13

14 U.S. Single-Tenant Industrial Buyer Composition 27 National Industrial Rank by Metro 5-Year Transaction Activity 28 NAIOP Do not duplicate or reproduce without written permission. 14

15 Questions: 29 Questions: How do overall supply chain dynamics effect real estate decisions? How do capital markets effect development and user decisions in this cycle? How are e-commerce and outbound overnight-freight effecting real estate decisions? What is driving new speculative development; user demand or capital? 30 NAIOP Do not duplicate or reproduce without written permission. 15

16 Q&A This is your opportunity to make this session exactly what you need it to be Ask the question. Please note that this session is being recorded, so before speaking, please either proceed to a standing microphone or raise your hand and wait until a mic runner reaches you. Thank you! 31 Thank You! Michael Murphy Chief Development Officer CenterPoint Properties mmurphy@centerpoint.com Don Chase Partner KTR Capital Partners dchase@ktrcapital.com Mark Hugeback Principal, Secretary/Treasurer M+H Architects hugeback@mha.us.com Al Pontius Senior Vice President/Managing Director Marcus & Millichap Investment Services (602) apontius@marcusmillichap.com Don Hansen Director, Real Estate & Development W.W. Grainger, Inc donald.hansen@grainger.com 32 NAIOP Do not duplicate or reproduce without written permission. 16