These are not gargantuan fulfillment centers looming over former farmland. Nor are these strategically located, wired spaces whirring away in their work.
Class C warehouse and industrial spaces are facing an interesting problem, says Mike Wong, Commercial Director with Keller Williams Realty Southwest.
As a sector, warehouse/industrial is doing well, Wong says. Demand has been strong, and Wong has not seen evidence of an oversupply in the market.
However, there are many properties that are older, smaller, in less desirable locations, or unable or unlikely to be upgraded with the latest technology to make them more attractive to future tenants or buyers. This, the Houston-based commercial practitioner says, is leading owners in areas with significant distribution industries to think creatively about what’s next.
The flight to quality
Growing companies and thriving tenants are seeking higher classes of industrial space, Wong says, adding that this “flight to quality” is creating vacancies in Class B and C properties.
“These tenants are outgrowing your typical brick warehouses that were built in the 1970s with 12-foot clearances,” he continues. “They’re looking for more modern spaces that are wired up for more technical distribution.” These tenants are also seeking more convenient properties, such as the many spaces that have popped up parallel to major highways and growth corridors.
Renovate to keep moving forward
Some owners are choosing to renovate to stay competitive. Aesthetic remodeling and some simple amenities like a shared conference room or communal kitchen can help. Some new paint and vinyl flooring can go a long way, he says.
A new look can tempt tenants to renew their leases if the owner offers to spruce up their leased spaces as well. Other property owners have added fiber internet capability as an enticing upgrade.
New uses and tenants
Class C property owners are also considering adapting their buildings to new uses, including data centers, office spaces with executive suites, self-storage spaces, and even warehouse condominiums. There’s a trend among Class C warehouse/office leases in which churches, adult day cares, and independent gyms can absorb a lot of square footage, Wong notes.
He says Class C properties may attract businesses that are looking to downsize to a smaller footprint. “They may be budget conscious and don’t need some fancy new construction. They’re looking for someplace nice and low-key but also well-kept.”
Some stable small businesses, like plumbing companies or small construction groups, may be interested in an affordable home base. “I know of about six construction companies that are in the same warehouse park. They’re all aware of each other and know each other. For their size and budgets, this is a major savings for them. I encourage landlords to consider dividing their properties to accommodate these kinds of uses.”
Buy and hold
Some Class C properties are owned by what Wong calls legacy owners. “The owners’ parents probably bought the property back when it was $40 a square foot. It’s not costing anything to operate. The tenants pay the expenses but it’s worth more than it’s generating.”
Most of these properties carry no debt, so there is less pressure on landlords during challenging markets and vacancies. These owners may hold onto the property as an investment to pass along to their heirs or are waiting until they can generate a positive cap rate.
For them, any improvements would be made with an eye toward a future sale. “These are the buildings where smart capital improvements can make a difference,” he adds.
