Industrial vacancy has risen for six straight quarters to reach 6.1% in June and more space is soon to be delivered. But developers need not panic as the tide is about to turn, according to Marcus & Millichap’s midyear 2024 industrial report.

In those six quarters, the company noted, nearly 629 million SF of industrial space was delivered nationwide, increasing inventory by 3.5%. In 2Q 2024, the average asking rent fell for the first time since 2011, after spiking 44% over the preceding five years.

However, the report pointed out, that 27% of current vacancies occurred in just five metros: Atlanta, Dallas-Fort Worth, Houston, Riverside-San Bernardino, and Phoenix. Even though these are metros with high demand, vacancy is expected to rise as they are flooded with 108 million SF of new industrial space collectively in 2024, compared with 129 million SF to be spread among the remaining 31 metros studied.

With much new construction expected to be delivered before the end of the year, “completions may fall short of long-term demand in most markets, as tenants frequently favor newer and higher-tech facilities,” the report commented. That trend is spurred by automation and robotics, which encourage a search for newer facilities that offer these amenities. “New move-ins have generally entailed tenants vacating older, more rudimentary facilities,” it noted.

Demand for industrial space is also driven by the growth of e-commerce. “These factors will amplify omnichannel retailers’ and logistics providers’ long-term space demand, with leasing activity showing strength in the first half of 2024,” the report stated, citing the examples of Amazon, Walmart, Home Depot and Burlington.

In the first six months of the year, some companies opted to acquire their own facilities. They included Microsoft, NVIDIA, Nestlé and Fortinet.

The additional space required to accommodate increased automation is also driving industrial demand. Over 35% of the construction pipeline consists of facilities of one million or more SF and this was the only size category to improve net absorption in the year ended June 24. Rents in this category also improved 4.6% year-over-year for new supply.

At the same time, the report predicted demand for smaller to mid-sized facilities would rise over time, encouraged by new federal programs like the CHIPS Act and the Inflation Reduction Act as well as the shift to reshoring and nearshoring that encourage domestic manufacturing. Indeed, by segment, manufacturing had the lowest vacancy rate (4.5%) but also the lowest rent growth (3.2%). As of June, roughly 92 percent of the manufacturing space under construction already had a tenant in place.

“These dynamics position most metros to observe upticks in manufacturing demand for older, sub-250,000 square foot properties, influencing some owners to upgrade existing facilities to attract prospective tenants,” the report said.

Even the smallest facilities – which represented only 2.7% of active construction — are expected to benefit. “Ranking as the least-vacant size tranche as of mid-year 2024, assets between 10,000 and 50,000 square feet captured at least a 10-year-high share of trades in the first six months,” it noted.

The report also cited an active industrial lending environment that Fed rate cuts would boost. It noted that insurance companies accounted for 25% of all industrial financing in 2023 – the highest level in eight years – “mostly in the form of portfolios priced at $25 million and above.” Regional and local banks remained the primary lenders for loans of $10 million or less, representing 33% of all loans. Manufacturing and R&D sites are favored.

“Moving forward, the industrial sector’s long-term leases, limited move-out risk relative to other property types, and high availability of federal grants and tax breaks will continue to lead lenders to view these assets positively,” the report stated.

 

After a slight decline during the first three months of 2024, North and Central Jersey’s industrial sector was back in positive form during the second quarter with 5.9 million square feet leased – a 16% quarterly increase, according to commercial real estate firm CBRE’s New Jersey Industrial Figures report.

Strong demand by smaller tenants, particularly third-party-logistics (3PL) companies, which accounted for 47% of the market’s total leasing activity, helped push absorption to a positive 1.7 million square feet, according to the report. As a result, occupancy increased for the first time since early 2023 – the vacancy rate jumped by 10 basis points (bps) to just 5% due to the delivery of two million square feet of new product entering the marketplace, the slowest increase in vacancy since the same time last year.

“New Jersey’s industrial market continues to exhibit resiliency despite economic concerns and lingering inflation felt earlier this year,” said CBRE’s Chad Hillyer in a news release. “Smaller leases by 3PL and food and beverage companies accounted for most of the leasing activity during the quarter, which once again was strong, especially in the 50,000 to 100,000 sq.-ft. range.”

Given that 1.6 million square feet of space was absorbed in properties built after 2021, strong leasing activity in the second quarter was a boon for developers of new facilities. The largest two leases in the market during were DSV’s 355,000 square-foot commitment at 300 Salt Meadow Road in Carteret, and JW Fulfillment’s 342,000 square-foot lease at 99 Callahan Boulevard in Sayreville.

While the vacancy rate was up slightly, sublease availabilities reached the highest level since the third quarter of 2020 at 6.5 million square feet. The average asking rents remained relatively stable quarter-over-quarter with Class A space rents at $19.40 per square foot. Industrial space in Class B and C properties experienced an increase of 3% due to strong demand for smaller units, to end the quarter at $16.62 per square foot.

For most of the past decade, it has been challenging to find large blocks of industrial space available for lease near the largest U.S. seaports. In some markets, such as Los Angeles and Northern New Jersey, it was extremely difficult to secure any major spaces in the mid-pandemic boom in imports from 2021 through early 2022.

However, both the doubling of average industrial rents in many port-adjacent locations and the unprecedented wave of distribution center development have upended these tight market dynamics. In the current market, large tenants seeking industrial space near the busiest U.S. seaports have more options than at any point in at least 20 years.

According to the Census Bureau, the top five U.S. seaports by the combined weight of imports and exports processed in 2023 were the Port of Los Angeles, the Port of Newark, the Port of Houston, the Port of Savannah, and the Port of Virginia in Norfolk.

Since the end of 2020, the combined stock of existing industrial properties within a 30-minute rush hour drive of these ports has increased by 9.5% or 72 million square feet, roughly the size of 1,250 American football fields. Meanwhile, another 20 million square feet of industrial space remain under construction in these locations.

With developers focused on large projects that are designed to appeal to high-credit industrial tenants and garner interest from institutional real estate investors, the majority of this recently built space is comprised of projects that are 100,000 square feet or larger. The bulk of this space had also finished construction since the beginning of 2023 when industrial tenant expansions began to slow nationwide.

As a result, the square footage available for lease in industrial properties 100,000 square feet or larger within a 30-minute drive of the five busiest U.S. seaports reached a record late last year and has since risen even further, to almost 59 million square feet.

Even in the area within a 30-minute drive of the Port of Los Angeles, where the density of existing properties has kept new warehouse construction limited, the total square footage of industrial space available for lease in properties 100,000 square feet or larger is close to 8 million square feet, the highest level CoStar has ever recorded. Prolonged negotiations over a new long-term labor contract for the union that represents dockworkers on the West Coast, combined with industrial rents that sky-rocketed in mid-pandemic, have caused local industrial tenants around the port to shed space in 2023 and early 2024.

Among the five busiest U.S. seaports, only one — the Port of Virginia — has an availability rate in the single digits for nearby big-box industrial properties and below its 15-year average. Numerous marshlands and wildlife reserves that surround Norfolk, where the Port of Virginia is located, have kept nearby industrial construction very limited. Lower industrial rents than those found in major West Coast and Northeastern U.S. port cities have also kept Norfolk’s tenants from shedding existing space in the same numbers as recently seen in Los Angeles and Northern New Jersey.

Most U.S. industrial markets have a significant divergence in availability between big-box industrial spaces and smaller industrial spaces. The latter is in very short supply as few developers have built projects catering to tenants occupying warehouse spaces smaller than 50,000 square feet in recent years.

Industrial areas surrounding the busiest U.S. seaports are no exception. In stark contrast to record high availability among industrial properties 100,000 square feet or larger, space available for lease in properties smaller than 50,000 square feet and within a 30-minute drive of the five busiest U.S. seaports is still near the lowest levels CoStar had ever recorded before the pandemic.

Availability rates for industrial properties smaller than 50,000 square feet surrounding the Ports of Newark, Houston, and Virginia are all well below their 15-year averages. Meanwhile, availability rates for similar properties near the Ports of Los Angeles and Savannah are essentially commensurate with long-term norms.

 

According to industrial CRE giant Prologis, its Industrial Business Indicator Activity Index showed an April level of activity “consistent with demand generation, supported by macro data that reflects restocking inventories amid resilient consumption activity, although realized net absorption has lagged.”

However, that is paired with a continued reduction of industrial construction, setting up an ongoing and future lack of supply, with greater competition for space in 2025 and, presumably, rents rising.

The IBA Activity index was 56.3 in April, down from a 58 average present in the first quarter of the year. According to the company, macro drivers of activity were “solid” with core retail sales showing 1.1% month-over-month growth in March and a 4.5% year over year. “Adding to demand drivers, the more logistics-intensive e-commerce channel outperformed with 2.7% month-over-month and 11.3% year-over-year growth while in-store sales grew 0.4% month-over-month and 2% year-over-year in March,” they said.

Facilities utilization was about 85% in both March and April. That’s up from a low of 83% in the last quarter of 2023.

“Despite a strong rise in import volumes, sales outpaced inventory growth, pushing down the inventory-to-sales ratio to 1.24, approximately -3% below the 2019 average. This points to further need to build inventories, particularly for wholesalers.”

A lack of warehouse space could also have more extended impact on logistics, leaving less room for products coming into the country.

The company also noted that net absorption of 26 million square feet underperformed what might have been expected. “IBI readings and macro data suggest logistics real estate demand growth should be higher than what was realized in Q1,” they said.

Prologis pointed to two major but temporary factors. One was that some customers had been able to accommodate growth using capabilities in their existing networks, which the lower utilization rates and a rise in sublease space in some markets indicated. But there are likely only one or two more quarters worth of extra space left, as the 84.4% April utilization rate was below the more typical 85% to 86%. In addition, sublease space growth slowed everywhere other than Seattle and Southern California.

The second factor was economic uncertainty and an emphasis on cost control delaying decision making. “Evidence of this trend includes extensive property tours, longer deal gestation times and delayed occupancy dates, even with a rise in proposal activity,” they wrote.

With Q1 deliveries down by more than a third from 2023 Q4, there’s an end to record completions with tight construction financing and costs.

Prologis estimates that the result of accumulated pent-up demand and fallen construction of new supply will mean peak 2024 vacancy in the mid-6% range, which will fall to mid-5% in 2025.

 

The flood of new capital into industrial outdoor storage has retreated from the recent boom due to today’s cost of debt. But long-term buyers and specialized investors see the next year as one filled with buying opportunities, including in high-demand port regions and up-and-coming inland markets, for those with capital access.

Significant tailwinds have bolstered inland ports and adjacent IOS space, while port markets, which saw skyrocketing prices and rising rental rates, have come back down to earth, offering buying opportunities.

“The next 12 to 24 months are going to be probably the best buying cycle that we’ve had in the IOS space,” said Ben Atkins, co-founder and CEO of Zenith IOS, an investment, development and management company focused on IOS that formed in 2021.

In recent months, inland IOS markets have seen rapidly increasing activity and corresponding rent increases, making these assets more attractive acquisition targets.

Powered by onshoring and reshoring, transportation investments and a remaking of supply lines and logistics plans, this shift adds another source of future growth and demand to a sector that saw a run-up in sales volumes, prices and interest due to booming pandemic-era e-commerce activity. It’s helping IOS outperform other parts of the industrial market, which faces a leasing slowdown and recalibration.

“I would characterize all of these IOS markets to be fairly strong compared to general warehouse,” Realterm Managing Director and Senior Fund Manager Stephen Panos said. “We’re seeing outperformance on the demand side.”

Zenith IOS conducted a study of port versus inland IOS markets and found a decline in asking rents for port markets over the last 18 to 24 months. Seattle had seen asking rents drop between 10% and 20% during that period.

At the same time, the study noted that major inland ports, such as Chicago, Atlanta and Dallas, where growth was more muted during the early Covid period, have seen anything from 5% to 15% asking rent growth. Zenith didn’t provide more exact figures from its proprietary rent database, and third-party data on the IOS market is difficult to obtain.

“Markets like New York, New Jersey and Los Angeles, had an enormous run-up during Covid, and now you’re seeing a decline from that incredible high,” Zenith principal and head of investments Alex Olshansky said.

The value of port-adjacent space in high-cost, high-barrier-to-entry coastal markets became frothy from a price perspective. During the recent period of global instability and shipping chain challenges, including the war in Ukraine, Panama Canal backlog and Red Sea tension, these port markets saw a correspondingly larger drop in rent than in markets with less of a dependence on overseas imports.

That overseas shipping anxiety has swung the pendulum back towards manufacturing and shipping investments domestically and in nearby countries. In recent months, inland IOS markets have seen rapidly increasing activity and corresponding rent increases, making these assets more attractive acquisition targets.

The nearshoring and reshoring trend has reshaped inland ports, especially those on the U.S.-Mexican border, and is expected to continue doing so. Recent data suggests U.S. investment in manufacturing was up 63% year-over-year in 2023, and foreign direct investment in Mexico spiked 200% year-over-year. It’s a shift that’s likely to evolve considerably in the next five to 10 years, Panos said, which will likely reroute and reorganize supply chains, boosting different IOS markets.

“We’re pretty bullish on it,” Atkins said. “We think that that will be a big demand driver, a big tailwind for industrial real estate, for the foreseeable future.”

Despite weakness in the trucking sector, such as the bankruptcy of Yellow Trucking, the new demand for shipping for manufacturing, construction materials and the auto industry is making up for the loss and keeping noncoastal IOS in high demand. Most of the property sold off in the Yellow bankruptcy proceedings went for high prices. Many midwest IOS markets, which have low population growth and fundamentals that in other asset classes would suggest smaller rent growth, have shown steady, strong growth, said Panos.

Joliet, Illinois, for instance, 40 miles outside of Chicago, boasts highway connectivity and the convergence of six major railroads. The city has seen consistent industrial deal activity and new spec warehouse construction.

That strength goes hand in hand with increased consumer demand and the effort by companies to meet that demand in new markets. It’s creating demand for a more robust, expansive IOS network.

“Generally what we’re seeing is expansion,” Panos said. “We’re seeing little, if any, contraction.”

Couple that with other data points that inform IOS investor decisions — Zenith looks at multifamily growth, population growth and density due to close correlations between increased need for consumer goods and e-commerce — and border markets like Otay Mesa and El Paso have benefitted. Perhaps the most significant IOS market impacted by these trends is Laredo, Texas. The port city on the Rio Grande River has become the nation’s busiest port, with numerous new warehouses breaking ground and a 3% industrial vacancy rate.

And perhaps even more valuable to IOS growth, trade between the U.S. and Mexico is much more than even the U.S. and China, Timber Hill Group Managing Partner Cary Goldman said. The flow of trucks remains relatively even in both directions, creating much more demand for parking and truck yards.

“There’s a bottleneck,” Goldman said. “You have all this product coming in from Monterrey and it probably does want to get to Austin or Dallas, or somewhere else in Texas, and Laredo is this entry and exit door.”

But while that manufacturing growth will create an outsized demand for outdoor storage space around U.S. plants and factories, that doesn’t mean there won’t also be an outsized demand for distribution and logistics real estate centered on international trade.

In fact, the decline in port market rents tracked by Zenith will likely be a massive buy signal for IOS investors. Panos agrees, seeing it as a normalization, a chance to buy high-quality collateral cheaper with less competition, not a “catching falling knives” scenario.

“We’re more bullish now on buying in the coastal markets than we ever have been because they’ve repriced,” said Atkins. “We’re actively looking in those markets. The buying opportunities in the coastal markets are stronger than ever.”

Coastal markets, the areas with the highest density and highest land values, always feel too expensive, said Panos. But while it may seem like rents have nowhere to go, they’ve historically, steadily, risen.

“I do think it’s probably closer to the beginning than the end in terms of capital appetite for the sector,” Panos said. “We think this sector is three times larger than general warehouse. It’s a large, investable, universe.”

Zenith found that the IOS market still remains decentralized, both in terms of ownership and geography. Within the roughly $300B market, the top 50 markets only comprise $100B of value.

“Opacity equals opportunity,” Atkins said. “Early movers don’t want to make it easier for others to see the opportunities.”

 

Competition in the construction-supplies sector is turning into a delivery race.

Ferguson, one of the largest plumbing and heating materials distributors in the U.S., is adding three warehouses in major cities across North America over the next two years to step up its rapid-delivery capabilities in an increasingly competitive sector serving professional contractors.

Chief Executive Kevin Murphy said contractors have gotten used to fast shipping in their personal lives and now expect speedy fulfillment for materials, from toilets and water heaters to piping, that they need on job sites. “Their expectation is framed by, ‘I want to have my sunglasses delivered same-day,’” Murphy said.

Ferguson and its rivals are vying for a bigger share of a construction market that has been buffeted by volatile demand in recent years.

Overall U.S. construction spending has grown over the past three years, driven by a wave of companies building manufacturing plants and data centers. But residential construction has slowed as higher interest rates have pushed potential buyers out of the market, and office construction has turned sharply downward as a result of the faltering return to the office by American workers.

That is putting a premium on serving contractors alongside the big firms that manage larger projects and are trying to keep their costs down through tighter controls on materials inventories.

Ferguson, which is based in the U.K. with operations solely focused on North America, has restructured its supply chain to accommodate the shift, opening smaller, highly automated warehouses closer to population centers to fill orders for pickup and delivery on a tight turnaround. The company plans to open three more of what it calls market distribution centers by the end of 2025, adding to an existing network of four of the facilities as well as 10 larger, regional distribution centers.

Murphy said the company plans to eventually place market distribution centers in all major U.S. cities.

Evelyn Xiao-Yue Gong, an assistant professor of operations management at Carnegie Mellon University, said industrial customers have grown accustomed to fast shipping from retailers such as Amazon.com and Walmart. Shoppers now expect “more of the things they need in their life all around to be delivered in a fast timespan,” regardless of whether the product is for personal or professional use, Gong said.

Ferguson’s smaller distribution centers, which range from 350,000 to 750,000 square feet, fill a gap in the company’s supply chain between its 1,750 bricks-and-mortar stores and its sprawling regional warehouses that can exceed 1 million square feet. The market distribution centers carry more inventory than stores and include areas with lockers where customers can pick up their orders at any time of day or night.

“Many of our customers are going to a customer site or a job site predawn and so the ability to come pick up materials that they need on their way to the job is hugely important,” Murphy said.

The smaller warehouses have helped Ferguson cut fulfillment costs by allowing its suppliers to deliver full truckloads at a time and to smooth out production cycles, Murphy said.

A booming market for home-improvement materials during the pandemic has faded as consumers have pared back do-it-yourself projects and shifted spending toward services such as travel. Now, more building-materials companies are competing for business from construction and remodeling professionals, which they view as a strong growth market.

Home Depot is buying roofing distributor SRS Distribution in a deal valued at $18 billion that is aimed at bringing the home-improvement retailer more business from big contractors and construction firms. The Atlanta-based company is adding four distribution centers this year to its network of 14 warehouses targeting professionals, with dedicated sites handling bulky construction materials such as lumber, insulation and roofing shingles.

Serial dealmaker Brad Jacobs, executive chairman of less-than-truckload carrier XPO, in December started a tech-focused company called QXO that plans to acquire businesses distributing construction materials.

 

 

The industrial real estate sector in New Jersey faces a significant challenge. Many new industrial spaces are slated for completion in 2024, just as tenant preferences shift because of concerns about a slowing economy that potentially complicates the market landscape.

Currently, 19.2 million square feet of industrial space are under construction in New Jersey, equivalent to roughly half the size of Central Park in New York City. Thirty-four “new class A-type buildings” are now under construction or are planned to be delivered in 2024.

These brand new, single-story industrial properties are at least 200,000 square feet to approximately 1.2 million square feet. This influx of new space, particularly concentrated in northern New Jersey, is expected to negatively affect market dynamics.

Predictions suggest that the average vacancy rate for industrial spaces could increase to 5.1% in 2024. This would be a notable rise and the first of its kind since 2012.

New wave
Middlesex County is at the forefront of this new construction wave, with 4.7 million square feet underway, akin to nearly half the total floor space of the Pentagon.

Alarmingly, 90% of this upcoming space has not yet been leased.

This additional industrial real estate that is now destined for the New Jersey market creates tremendous opportunities for tenants and purchasers, as the formerly “tight markets” start loosening the developer’s/landlord’s firm grip on pricing any available space.

However, the state’s industrial real estate developers still have a growing preference for developing larger, mega-sized properties (over 200,000 square feet, or equivalent to about two Manhattan city blocks).

These properties, which represent 67% of ongoing construction, have a low pre-lease rate of just 8%. Unless deal velocities pick up, this situation could lead to increased leasing concessions by developers as more “shell buildings” enter the market.

Turning tide
Tenant preferences are also evolving, with a noticeable trend toward mid-sized buildings, ranging from 50,000 square feet to 150,000 square feet — comparable in size to an NFL football field. This shift is challenging the leasing landscape for larger spaces.

That may potentially lead to long-term vacancies or necessitate a reevaluation of use for these larger properties from developers hoping to hit a “home run” with a single-tenant, rather than having more capital-extensive multi-tenanted or possibly repurposed developments.

Such changes underscore New Jersey’s industrial real estate market’s dynamic nature. They also signal a critical adjustment period for developers and property owners until more positive signs of increased demand for space arise, akin to 2020 and through the heights of demand that went into the first quarter of 2023.

In the face of New Jersey’s industrial real estate evolution, the emergence of new Class A space presents an unparalleled opportunity for tenants and buyers to capitalize on more favorable market conditions.

 

Fallout from the National Association of Realtors’ settlement of a $418M antitrust lawsuit earlier this month is set to profoundly shake up the residential real estate industry and how it does business.

But commercial brokers, attorneys and policy watchers are greeting what amounts to potentially earth-shattering changes in commission structure on the residential side with a general shrug of the shoulders, despite a few exceptions that pertain mostly to condo sales and crossover agents who dabble in commercial real estate deals that turn up on multiple listing services.

“I don’t think it’ll change the big picture on the CRE side,” said Shams Merchant, a Fort Worth-based real estate attorney with Jackson Walker, pointing out the fact that commercial transactions have always been different than residential sales, with commercial landlords and sellers free to negotiate commissions with buyers or tenants’ brokers as an incentive to lease or sell a property.

On CRE’s side is the fact that “there’s no industry standard” to spark antitrust concerns and no organized clamor to do so, Merchant said.

In mid-March, NAR agreed to pay $418M in damages over four years to settle lawsuits levied by home sellers who argued the organization’s longstanding rules on broker commissions resulted in excessive fees. As part of the settlement, NAR said it would revisit its standard 6% sales commission fee for residential Realtors in a move some real estate observers said would “blow up the market” for brokers that are among the world’s best-paid.

The rule changes from NAR’s settlement will ban it from allowing a seller’s agent to set compensation for a buyer’s agent, remove commission information from multiple listing services, no longer require agents to subscribe to MLS and mandate that buyer agents enter into individualized buyer-broker agreements with clients.

Researchers say the shift could result in Realtors’ commissions falling by as much as 50% annually and up to 2 million U.S. agents leaving the field. But commercial real estate brokers and transactions likely won’t be impacted to a significant degree, according to experts who spoke to Bisnow.

“We deal directly with our clients on listings, so we’re not using the MLS,” said R.J. Jimenez, an Oklahoma City-based industrial broker with NAI Sullivan Group. “The software we use isn’t proprietary to Realtors only, so I think that’s what helps out.”

What’s more, Jimenez said, no agency holds a monopoly on commissions in the commercial sphere. In the aftermath of the NAR settlement, Jimenez launched a social media thread asking brokers if they anticipated any changes on the commercial side due to the settlement.

Answers ranged from “It doesn’t” to “We get paid based on how much value we bring to the sale. Not whether the buyer likes the pool and kitchen.” Some speculated the rules change could prompt more residential agents to move over to the commercial side, while others tossed doubt on that idea, saying that “good selling agents will educate their seller on paying a buyers agent so as to not reduce that buyers pool that cannot afford to pay for their agent.”

While the fallout may push some Realtors out of the profession, it’s unlikely that they’ll move in droves to the commercial real estate sector because they’re just so different, sources told Bisnow.

It takes years of consistency for commercial brokers to get to a place where deals are regularly happening, while many residential agents do real estate part-time or as a side job, Merchant said.

“You can’t do that on the commercial side,” he said. “It’s a full-time job.”

Since the settlement announcement, NAR has stressed that it does not set commissions, only requiring that listing brokers communicate an offer of compensation. But most U.S. agents specify a commission of 5% or 6%, according to the New York Times, leading to the antitrust charges.The impact of the NAR settlement on day-to-day CRE exchanges is expected to be minimal, but the lawsuit could potentially seep into some limited segments, Merchant said.

“The mom and pop owners who own one or two properties might be more reluctant now to pay the tenant broker’s commission,” he said.

Those types of property owners don’t have as much capital to pay out tenant brokers’ commissions, and the NAR lawsuit shows them they don’t have to. That could lead to more tenant brokers entering into exclusive representation agreements with their tenants, he said. Those agreements would specify that if the landlord does not cover their commission, the tenant will, he said.

“This is common, but it may become more common going forward,” Merchant said.

In addition, residential Realtors are already sometimes involved in commercial transactions and will have to shift to abide by NAR rules, said Ed DiMarco, a Realtor based in Naples, Florida.

DiMarco, who sometimes works with small-to-midsize commercial property transactions, said that he would always choose to be a member of NAR. Naples has a smaller commercial market, and most listings are on an MLS, he said.

“I probably find more [of my] listings on the actual MLS managed by the National Association of Realtors,” DiMarco said. “They’ve also been going after commercial for over a decade now, real hard, and they have some great tools.”

The lawsuit settles what DiMarco has always seen as a conflict of interest. A broker’s expectation to be paid by the seller rather than their own client can make them partial to the seller, he said. DiMarco has always done buyer agreements for that reason, no matter what the seller might be offering.

“Now it’s going to be standard, and I think that will also help a lot of agents … who have been afraid to ask for them because you can always find agents that don’t require them,” DiMarco said.

In smaller markets like his, Realtors are often involved in commercial transactions, DiMarco said, adding the NAR lawsuit outcome will absolutely impact commercial brokers commissions, an argument he outlined in a LinkedIn blog post.

The lawsuit will also impact developers of residential condo towers, like those represented by Preston Patten, an Austin-based shareholder and attorney at Winstead law firm. If a buyer of a residence has a broker, they will likely have more upfront cautionary measures and paperwork, he said.

But for office, industrial and other commercial asset classes, Patten said he doesn’t expect much change.

“It will be business as usual from my perspective,” he said.

One company that handles residential listings might be set to benefit from the lawsuit’s fallout, however. CoStar’s stock price rose 8% on March 20, the same day that the settlement news broke.

CoStar’s Homes.com does not sell homebuyer leads to buyer’s agents, instead providing them free to the property’s listing agent, theoretically insulating it from effects on buyer agents that the new rules impose, according to YahooFinance. CoStar did not immediately respond to a request for comment.

Homes.com doesn’t monetize buyer agency and take a portion of agent’s commissions like its competitors do, CoStar said in an investor slide deck, according to YahooFinance.

“I do think CoStar is in a position as it stands, depending on how they play their cards, to get ahead of the game with this move,” DiMarco said.

But players in the commercial world at firms like JLL and CBRE are very sophisticated and specialized, so their processes will remain the same, Merchant said.

“In commercial, we’ve always done it differently anyway. The seller broker never had to upfront set the commission like they did in residential,” he said. “That was the whole lawsuit. They would have to set the commission up front and provide it through the MLS. We’ve never done that in commercial.”

 

Investors today are finding it difficult to resist the siren song of industrial outdoor storage, that alluring array of fenced-in parking lots for trucks.

IOS has rapidly become one of commercial real estate’s hottest asset classes as a flood of new money has sent prices sky-high.

“You create a buzzword, make it sound sexy and interesting, and everybody wants to have it,” Blau & Berg Senior Executive Director Michael F. Schipper said.

But investors looking to enter the space may crash on the rocks of an industry that is trickier — and less like the rest of the industrial market — than first meets the eye, and the talent pool of people with expertise in navigating the hazards is limited.

The sector is exploding. In just the last few weeks, alternative investment specialist GreenPoint Partners launched a $500M investment platform, adding to an estimated $200B market nationwide.

But despite an increased spotlight and billions of dollars, IOS still has a mom-and-pop feel.

“There aren’t many people who specialize in it, and it’s a nuanced industrial sector,” said Industrial Outdoor Ventures CEO Tom Barbara, who began buying up properties in 2005.

The general concepts, financing and trends can be picked up by those with general real estate experience. But true success in industrial outdoor storage requires more aggressive and time-consuming approaches to acquiring property, and in-depth understanding of trucking and logistics that many new buyers lack.

Inexperienced and ill-informed buyers don’t understand or appreciate the cyclical nature of the site, or how a location with an odd alignment or placement a few more miles down the highway can significantly impact long-term value, Schipper said. He noted that a pair of 4-acre sites, one rectangular and the other in an odd shape, may seem similar on paper, but the layout can significantly alter how many trucks can park there, multiplying its potential.

“Part of the issue that I’m seeing right now is lots of people out there looking to buy sites aren’t talking so much to people who use them, but those who have acquired them,” Schipper said. “You need to talk to truckers, talk to end users and have a finger on the pulse.”

New talent needs to understand some of the different metrics and pricing that go into IOS, Barbara said. The first is the seemingly absurd rental rates, which tend to be based on floor area ratios of small covered buildings and massive truck lots or parking facilities; $250 per SF rents seem ridiculous compared to traditional industrial rents until the land factor is taken into account. And pricing tends to be on a per acre, per month basis, a different calculation than most industrial brokers are accustomed to discussing.

But perhaps the most striking difference is the relative informality of the industry. Traditional industrial tends to be filled with established players, multinational retailers and increasingly sophisticated data analytics. IOS owners tend to be small, often family firms and aren’t as well-connected or accessible.

“There is limited data that is widely available or third-party resources/websites that actively track IOS specifically,” NorthMarq Commercial Associate Mark Grossman said. “This creates a higher barrier of entry, as compared to other asset classes, as it takes more time to learn and understand the space.”

There’s also the matter of long-term value. Schipper found that some sites renting for a few grand a month may have exploded in value during the pandemic and now charge $20K-$30K. Savvy buyers need to understand that prices can deflate as fast as they inflate. They also need to make sure they grasp local zoning issues; he’s noticed many buyers realizing too late that they can’t use sites for the type of storage they intended.

“Recently, there’s been a lot of irrational exuberance,” he said. “It’s sort of like hysteria: I better do it now, because if not, someone else will.”

Ideally, bigger funds or teams interested in IOS hire someone with extensive trucking and logistics experience, he said.

Daniel Laub, a co-founder of Zenith IOS, which launched in 2021 and now employs 20 people, stumbled into the industry in a sense while working on a self-storage deal with his co-founder. He saw the opportunity and began to do more in-depth research into the space. Starting with deals in Dallas and around Florida, he quickly put together a pipeline of deals that’s now worth $700M, covering 45 assets across 20 markets.

Laub said 24 months ago, brokers didn’t really understand what Zenith was looking for, and now, the “Marcus & Millichaps of the world are putting out white paper memos on the space.” It’s a market that’s transformed, but it’s still more about small regional players with $20M to $50M, as opposed to truly national portfolios, Laub said.

“IOS sites at $12M at a time are not that interesting from the institutional investor perspective,” Laub said. “But if you can put a portfolio together, you know, a billion plus, which we’re close to today, then it becomes a different conversation.”

That push to assemble larger portfolios is making IOS as an industry search out more buyer and broker talent. But finding good talent is a challenge, Laub said, especially in a marketplace without lots of experienced staff.

Many of the deals Zenith has done to acquire assets focus on pivotal moments: An owner passes away and their family doesn’t want to hold on to the site, or business restructuring creates an opportunity to pare down land ownership or do a sale-leaseback. Brokers and buyers need to be able to work with owners who may not have much of a real estate background.

And beyond the challenge of finding knowledgeable buyers, larger entrants into IOS need staff for site identification, closing, asset management, leasing and accounting. Zenith has found that post-closing, many deals require some kind of modest capital expenditure spending, which requires a proper, experienced team if you’re operating across multiple markets.

The rocketship of land values has tapered off in recent months, Laub added, so he expects additional opportunistic buying in the near term. He sees IOS as a “multi-100-billion-dollar market,” with more competition buying space and driving up assets. And that requires a lot of patience and hands-on work.

“The biggest difference in coming from any other commercial sector is the ticket size is smaller, which creates a totally different mindset,” Laub said. “I come from the New York City real estate world, and nothing there costs $10M.”

 

As the busiest port on the East Coast, the Port of New York and New Jersey (PNYNJ) exceeded pre-pandemic container volume levels, handling 7.8 million TEUs in 2023, a 4.4% increase from 2019, according to Cushman & Wakefield’s 2023 year-end Port of New York and New Jersey (PNYNJ) industrial review.

The port has undergone a $220 million project to enhance port capacity, including the redesign and rebuilding of Port Newark’s northern entrance. The report notes a 240 basis point increase in the vacancy rate of the Port Region, reaching 5.3%, primarily due to new product deliveries. Leasing activity surged in the fourth quarter, surpassing 1.0 million square feet for the first time since 2021.

“This report highlights the Port of New York and New Jersey’s resilience and strong recovery from the pandemic. Despite facing challenges, the Port has achieved more than pre-pandemic container volume levels and continues to be the busiest port on the East Coast,” said John Obeid, senior research manager of Cushman & Wakefield.