The Future of Industrial Real Estate is Flexible
Industrial real estate has been on a tear. Leasing prices have risen dramatically in the last few years, especially around dense urban cores. Occupancy is high. Cap rates have fallen. Developers scramble to provide supply, and lenders are eager to back it up, seeing retail’s headwinds as industrial’s tailwinds.
In a world where large industrial tenants like Amazon are eating up industrial space like a cheap Chinese buffet, it is harder for small warehousing tenants to find space. But flexible, short-term space for small tenants has become a dominant theme across traditional real estate asset classes, with coworking headlining its immense rise. While it may no longer be as savory to be described as the “WeWork of _____”, there are still enormous growth opportunities for startups that iterate on the traditional lease model in order to accomodate startups, small businesses, and other tenants that cannot or would prefer not to sign traditional leases.
Greg Heaps, CMO at Chunker, was kind enough to talk us through their short term industrial leasing marketplace.
How do you find inventory for Chunker when industrial occupancy is so high?
Warehousing occupancy, from a landlord’s perspective, is definitely high right now. This means they have tenants occupying the majority of their available space. However, the reality is, in many cases tenants take more space than they need. Reports show that of the 20+ Billion sq ft of warehouse space in the US, about 25% is physically empty. Tenants lease space that they plan to use within the next 5–10 years, and take more to a fault to avoid costly relocation. Taking extra space that you plan on growing into can create short term cash flow problems for these tenants.
Chunker can help offset the cost of a larger space by inserting short term occupants, allowing the tenant to recoup some of that expense while maintaining control of the space and flexibility. We find inventory and unused space by reaching out to the market through our sales and marketing channels.
Is Chunker leasing space to short term tenants, small tenants, or both?
Chunker is a short-term warehousing platform for anyone NOT in a position to sign a long-term lease. Landlords typically want 5+ years for a traditional long-term lease. Not everyone needs space for that length of time. Short-term needs are often driven by fluctuating inventory, seasonality, or forecasting issues. Chunker has been used by a wide range of companies including the largest such as Walmart doing a 6 month deal for managing a remodel, all the way down to the smallest startups for a video shoot.
How long is the average stay for an industrial tenant that Chunker places with a landlord?
The average Chunker deal is typically 3 to 6 months. However, Chunker has been used for a one day deal, or all the way up to two years. There is no hard limit to the leasing period, which is typically driven by the needs of the lessor and lessee.
Have you seen any cases of a tenant occupying space through Chunker initially, and then signing a full, traditional lease at that property?
Short-term leases have traditionally been extremely difficult to get done because it’s like finding needle in a haystack. There is unused space out there but no one knows where it is, and those looking for short-term space have had nowhere to go so they call their broker. Brokers typically don’t want to work on short-term deals. They get little or nothing for doing them and they end up being a hassle. Whereas, brokers can earn a 10% commission for facilitating a deal on Chunker.
What do short-term industrial tenants typically look for in a property? How does it differ from larger, longer-term tenants?
There is a variety of specifications and details that a tenant typically looks for depending on what they are storing, how they load trucks, if they need a temperature controlled environment and so on. These can be the same or similar to long-term requirements, but typically a short-term tenant is less picky because they realize that the timeframe is so short that they can tolerate an item that they may absolutely need when signing a long term lease.
What type of rent per sqft can a landlord expect when using Chunker?
Short-term leases can typically draw a 50% to 100% premium over current long-term market rates. This is possible because
- short-term space is difficult to find
- companies with short-term needs are often driven by an urgent critical event and
- these companies are typically more flexible with the fees knowing that it is only for a short time period.
Industrial has a lot of things going for it. Savvy investors are making big bets into the sector. The warehousing scene will still be headlined by major tenants taking up big leases, but flexibility for warehouse leases is here and growing.
Like reading about real estate’s flexible future? See a couple of our previous posts on the topic:
The sharing economy of real estate
Hospitality is the Cranberry of Real Estate
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