The squeeze
I'm an asset manager of a fairly large industrial/flex portfolio (+/- 4 million SF) in a tertiary market in the Southeast...and things are getting uncomfortably tight.  Assets are 98% leased, cost of refinance debt is increasing and banks are pushing for 20-year amort. down from traditional 25-year (we are still getting 25, but they're asking for it more), insurance premiums for our portfolio went up 40% last year, and are expected to rise another 25% this year with fewer carriers electing to bid on the portfolio policy (no significant loss history)...and finally, holy hell construction costs seem like they are increasing monthly.  Office build-out from a shell warehouse is now $75/SF...it was $45/SF in 2010.  HVAC is now $1,600/ton for a package unit and I remember when it was $500/ton just 10 years ago.

Add to that the fact that Amazon is about to hire 2,000 warehouse workers at $15/hour in an already tight labor market where average warehouse wages are below that level...meaning tenants will have to pay up to keep employees, or lose them and take on shittier forklift drivers who will ultimately increase the wear and tear on our buildings.  And finally, truck drivers are getting shittier and shitter, especially for last-mile 3PLs who are hiring younger drivers who cannot dock a truck without slamming into the building or demolishing our curbing and landscaping when they pull into the driveway.

We're at a serious squeeze point and while we're financially in very good shape and the portfolio will continue to be a serious cash machine for the owners...where the hell is the new opportunity going to come from?  How can flex product survive with such high turnover costs?  Does anyone build code-compliant modular offices that can be arranged like legos and hooked up to in-place utility lines?  I'd rather expense the rental cost of a office pod than continually depreciate offices that the next tenant will want to change.  I've really been hoping to find a way to build a traditional 18' flex building out of cross-laminated timber, but the damn multi-family boom has sent the price of lumber through the roof.

&amp;#x200B;

rant over.
[{"id": "e8x320f", "text": "No idea what to tell you but i enjoyed reading your post since it was from a non-brokerage perspective. ", "replies": [{"id": "e8x7e55", "text": "Agreed. Very rarely do the rose-colored lenses come away ", "replies": [{"id": "e8x922o", "text": "don't get me wrong, it's a great time to be an owner of industrial property just about anywhere in the country.  but we also like to develop because, well, it can be a ton of fun and is a great creative process.  but when the risk of new development increases in a non-linear fashion (unstable costs rising faster than historical averages), we have to step back and be more prudent...which can take a lot of joy out of the job.  In high population growth markets (think Charlotte, Nashville), it's marginally easier because the \"tide\" is still rising...but where we are, the population hasn't changed in 20 years and our growth is completely flat...so you have to analyze the existing tenant base to make sure you only build to meet existing needs, and make sure you're not doing a vanity project that no one values more than you do.", "replies": [{"id": "e8xdw4e", "text": "Come on over to the ATL ... we need another 20m sq ft of warehouse this quarter !!!!", "replies": [{"id": "e8xgu1q", "text": "Does ATL even have 20 million SF worth of vacant land?  At a 50% coverage ratio, that's 1,000 acres that is needed!!", "replies": [], "depth": 5}], "depth": 4}, {"id": "e8y0nb9", "text": "Try being from Detroit man. ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "e8x89je", "text": "are you mainly tenant-rep?  any questions you have for someone who sits on the other side of the table?", "replies": [], "depth": 2}, {"id": "e9acocv", "text": "Yeah, I feel like I learned a lot just reading it. He's pulled together a lot of different data points. \n\nOne thing I think is coming: the inevitable RE crash in single family homes which may follow a correction in the stock market or may precede it. That may help reduce the costs on building supplies? Make construction cheaper? ", "replies": [], "depth": 2}], "depth": 1}, {"id": "e8x6s6f", "text": "Why not sell it all ?", "replies": [{"id": "e8x876e", "text": "The owners are making so much money that I don't think they would be able to replicate the investment in any other asset class without taking on a significantly higher degree of risk...unless for some reason we determined that there was a premium on having a more liquid asset that would make it worthwhile to pay the capital gains taxes.  But again, you sell $200 million in real estate and do what?  Buy equities at all time market highs, or buy more real estate at all time market highs?  There really isn't a good alternative that I can see other than to just take care of the assets and smartly re-invest with a 30-year hold mindset.  Tax laws for long time holders have never been better.", "replies": [{"id": "e8xdoo8", "text": "No, I hear you 100%.  I was saying 'sell it all' tongue and cheek.\nI'm in the same boat with developing apartment complexes.  It feels like every month my lumber bill goes up another $1800/unit.  My concrete bill goes up couple of hundred bucks.  My workers get paid more and more and the work gets shittier and shittier. OSB went from $8.10 to $16 in 1 month.  And it's an arms race between the builders to put better and better material into each unit.\n\nBut like you said .... what the hell do I do with the cash if I sold out?  If I knew a crash was tomorrow, it would be great but I dont have a crystal ball.", "replies": [], "depth": 3}, {"id": "e8yk7xz", "text": "You could buy most of the vacant malls in the US, use them for storage or redevelopment projects. Will be hard to lose money buying property for about $2 a foot. ", "replies": [], "depth": 3}], "depth": 2}, {"id": "e8xrmj4", "text": " Sell all, pay tax, and then what? ", "replies": [], "depth": 2}], "depth": 1}, {"id": "e8x7fm7", "text": "I did my masters thesis on modular building development and I work in real estate up in Boston. Things are tight up here as well. PM me though. I think we can talk through some opportunities.", "replies": [{"id": "e8y0r69", "text": "Can you give me the most generic numbers  (i realize every deal is different) from what you are seeing in traditional construction cost per sq ft vs modular construction cost per sq ft???", "replies": [{"id": "e8z0kye", "text": "Here in Boston it can be up to 30% savings if built off site in terms of cost. There are numerous major advantages to prefab. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e8xarko", "text": "Not much to add, except that I sympathize. We are feeling the squeeze for similar reasons in resi development. Especially with construction costs and opex escalation. Somehow my peers are still pursuing deals, but almost nothing we underwrite makes financial sense right now.", "replies": [], "depth": 1}, {"id": "e8xjego", "text": "Glad im on the finance side and that our developers use gmp contracts.", "replies": [], "depth": 1}, {"id": "e8xkcm9", "text": "I feel you man, Im in commercial and multifamily and it feels like a perfect shit storm with high costs, rising rates, and flat rents. Recently had a smaller multifamily deal quoted at about $350k per door/$300 per ft (just construction, from 3 different firms), when the market rent for new build is $1.60 a foot. \n\nIn my market though, people are putting up 1m sq ft warehouse spec, and its leased before they are under roof. At least industrial is strong.", "replies": [{"id": "e8z7lz3", "text": "$300/ft ... wtf ?   Is it super boutique ?", "replies": [{"id": "e8z8e2d", "text": "Labor shortage man. Three years ago the same firm was quoting jobs at $110/ft. It's a 24 unit class A noncombustible build, but nobody wants something that small when they can get 100 unit projects so they over price. Have a 65 unit project we just did a piece of mezz on at about $140k/unit adaptive reuse,but it's an owner contractor. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e8ym6n9", "text": "Borrow off the equity at 5% and lend it out at 10%. ", "replies": [], "depth": 1}, {"id": "e8zkvhi", "text": "What do you mean by \u201ccost of refinance debt is increasing.\u201d ", "replies": [], "depth": 1}, {"id": "e92yvt7", "text": "What\u2019s the minimum investment for your portfolio?\n", "replies": [], "depth": 1}]