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Race for Space

By: Michael Hoban

Brokers and Developers Are Getting Creative to Ease Industrial Space Crunch

As nationwide vacancy rates for industrial properties keep registering record lows, and pricing for those assets skyrocket, brokers and developers are devising creative strategies to meet the insatiable appetite for space fueled by the ecommerce boom and supply chain issues.

A report released in October of 2021 by Prologis—aptly entitled, “Space Effectively Sold Out”—paints a fairly stark portrait of the limited supply in the market, and the numbers are eye-popping. Driven primarily by strong retail sales and supply chain challenges, U.S. net absorption for industrial reached a record high of 115 million square feet (MSF) in Q3 2021 and 280 MSF year-to-date—more than double the same period in 2020. That demand has pushed the vacancy rate to a new low of 3.9% nationally, with rents increasing by a record 7.1% from the second to the third quarter.

Construction starts rose to an all-time high of 120 MSF, with speculative construction accounting for 88% of all starts in Q3. But even that will not satisfy demand, as Prologis Research predicted net absorption of 375 MSF and deliveries of 285 MSF for the full year. On the investment sales front, transactions for industrial assets through the first 11 months of the year totaled $61.6 billion—an all-time high for sales volume—with sales prices averaging $111 per square foot in November. This is up a whopping 27.4% year-over-year across the markets, according to Commercial Edge.

With space at such a premium, and land costs exploding—particularly in densely populated metros—brokers and developers are coming up with outside-the-box solutions to accommodate space users.


“Every market in the country is critically low on available industrial product right now, so sales and leasing prices have increased dramatically across the board in the last three to four years,” says Richard Sleasman, SIOR, president and managing director with CBRE-Albany in New York. “So what we’re doing is trying to find ways to shake the trees to create inventory that might not be on the market but maybe should be.”

One of the “tree-shaking” tactics Sleasman and his industrial team are deploying is identifying owner-occupied industrial buildings that may be underutilized by their occupants. The investigative work includes reviewing lists of manufacturers at the Chamber of Commerce, as well as old-fashioned tour rides to industrial parks or individual buildings in core areas, to evaluate inventory—particularly buildings with businesses that have been operated by families for generations. “The truth of the matter is that second or third generations in a family business may not have the same strategic thinking for the business as their parents or grandparents did,” explains Sleasman, who adds that companies that are in old-line industries experiencing a natural downturn because of competitive or technology trends (versus a tech business) are more likely candidates.

"So what we’re doing is trying to find ways to shake the trees to create inventory that might not be on the market but maybe should be."

Sleasman and his team recently identified such a prospect, a family-owned building supply company in a 50,000 square foot warehouse/flex building with a product showroom in a core location. With most customers now able to view inventory online, the showroom and much of the building is currently underutilized. The brokers advised the owners that they could turn the building into an income-generating rental asset in a high-demand market or sell it outright at a greater value than they realized possible while operating their business in approximately one-third of the space in another building outside the urban core. “That came as quite a surprise to them,” says Sleasman, who says that many owner-occupiers are unaware of the current value of their properties. “A lot of these older, yet fully functional buildings were considered low value real estate, but now they represent opportunity,” he says. “Our job as brokers is to educate them on the market and make sure that they’re aware of the upside opportunity that’s in front of them that they may not be privy to.”

Sleasman emphasizes that the key part of such discussions must be to understand the people that you’re talking to, their business, and the industry in order to give them meaningful ideas as to how the re-utilization is going to positively benefit them. “Part of the discussion is the inherent value of the proposition, but the other part is getting them to understand how this is most likely a better way to operate their business as well,” says Sleasman.


As a result of the pandemic and supply chain issues, more users are requesting accelerated speed-to-occupancy timelines. “One of the things we’re noticing over the last three months is that 100% of these users need the space right away,” says Pat Feeney, SIOR, senior vice president and industrial and logistics specialist with CBRE Phoenix. Compounding the issue is the demand for industrial space within the Phoenix market, which averaged 9.5 MSF of absorption from 2014 to 2019, but has ballooned to an estimated 21 MSF in 2021.

In December, Feeney was representing four tenants, all of whom were looking to occupy space immediately. One user was seeking one million square feet of warehouse/distribution space. They were shown two options on a Friday and signed a licensing agreement for a 10-year lease at a 1.3 MSF facility the following Tuesday. “And they wanted the keys on Wednesday,” says the 35-year veteran. The sense of urgency is being driven in part by disruptions in the supply chain, as users fear the backlog of container ships at the nation’s largest ports will continue to dog the industry into 2022, preventing companies from getting their product on store shelves.

“What I’m hearing from users now is that they absolutely need the space within weeks or two months, and it’s causing havoc because all of the new product that’s being built in this market is in shell condition,” says Feeney. In response, he is encouraging landlords that are building new product to get ahead of the competition by constructing spec office, installing minimal lighting in the warehouse, and ordering dock equipment, which enables companies to begin operations more quickly. “That way we can get a user operational in 10 days to two weeks, versus a competitor’s building that may take four to six months to get ready for occupancy,” says Feeney. “We’re trying to find a solution for this short-term demand for space in a flexible manner. We think it gives the landlord a competitive advantage, and users are willing to pay more if your building can be delivered four months earlier than the competition.”


Another solution that brokers and developers are employing is the modification of existing industrial properties to create additional space. This tactic is particularly valuable in markets like Boston, where available space close to the city is in short supply and industrial developers have difficulty competing for land with multifamily and life science operators, as well as the burgeoning cannabis industry.

Arlon Brown, SIOR, senior vice president for SVN Parsons Commercial Group in Boston, says these modifications are being made in two principal ways: removing the second floors of two-story R&D buildings, or raising the roofs on single-story warehouse facilities to create high bay space. “Unlike an office building, a lot of these R&D buildings have heavy floor loads, typically six inches of concrete reinforced with rebar, so it’s well-suited for warehouse use,” says Brown. There have also been several projects in the Boston metro area where landlords have raised the roof on single-story warehouse to gain additional clear heights,

"A lot of these older, yet fully functional buildings were considered low value real estate, but now they represent opportunity."

“It’s not done in Boston as much as other markets because the snow load makes the project more costly,” says Brown, who estimates that raising a roof may cost as much as $30 per square foot (psf) in Boston versus $4 to $8 psf in southern markets. “But if you’re close to Boston, and you can get rents in the low $20s, you’re going to recoup that cost pretty quickly.”

One developer that has effectively adopted both strategies is Seyon, a Boston-based value-add industrial owner that has grown a portfolio of over 50 assets totaling six million square feet in less than five years. In 2019, they acquired a single-story, 188,000 square foot manufacturing facility 30 miles outside of Boston, and re-positioned the spec building through extensive renovations, including doubling the clear height from 17 feet to 32 feet by raising the roof. The strategy paid off, as Seyon inked a long-term, full-building deal with a user before renovations were complete.

“The key is delivering the infrastructure —whether it’s clear heights, dock doors or power upgrades, and it’s a lot heavier lift to get those properties into a position where they’re ready for the tenants,” says Greg Hughes, construction manager at The Seyon Group. “I’ve been in industrial real estate for my entire career, and you have to get way more creative now in order to deliver industrial product.”

Sponsored By SIOR Foundation
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. 
The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.


Arlon Brown, SIOR

Pat Feeney, SIOR

Richard Sleasman, SIOR


Media Contact
Alexis Fermanis SIOR Director of Communications
Michael Hoban
Michael Hoban

Michael Hoban is a Boston-based commercial real estate and construction writer and founder of Hoban Communications, which provides media advisory services to CRE and AEC firms. Contact him at michaelhoban@comcast.net