Industrial real estate is experiencing record low vacancy across the United States. The primary cause is an e-commerce boom, which has retailers clamoring for e-commerce fulfillment centers. The sector has created a need for an additional 330 million square feet of industrial space by 2025, only 27% of the total expected demand. This number doesn’t account for additional demand driven by factories, data centers, traditional retail distribution centers, and more.
Building industrial facilities is costly and time-consuming, so industrial developers must begin working on speculative projects to provide much-needed space later on. With demand so dramatically outpacing supply, many industrial developers have struggled to find usable locations. Instead of competing with a dozen other firms for every piece of viable land, some developers make more non-traditional choices about where they build.
1. Failed Golf Courses
Developers have been making a run on old golf courses. Most golf courses would be relatively easy to build on since the land is relatively flat and undeveloped. However, golf courses are rarely zoned appropriately for use as industrial sites, so most real estate stakeholders wouldn’t think to pursue them as feasible sites for warehouses or factories. But some developers have gotten lucky in recent years by finding locations that ticked the right boxes. Here are two examples:
- Amazon announced plans to build a 3.8-million-square-foot distribution center on 111 acres once known as the Liverpool Golf and Country Club in Clay, New York. The course closed in early 2020.
- UPS is building a one-million-square-foot, 245-dock sortation and distribution facility that was once the site of Island Green, a golf course that went out of business in 2011.
2. Empty Shopping Malls and Retail Stores
It isn’t clear how much lasting damage COVID-19 has done to shopping malls and brick-and-mortar retail yet, but realistically, the sector was hurting even before the pandemic. While retail-to-industrial conversions will probably never be a primary means to create new industrial supply, that doesn’t mean some developers haven’t had a lot of success in the area.
Unsurprisingly, Amazon has spearheaded the industry in shopping mall conversions. From 2016 to 2019, Amazon converted about 25 shopping malls into fulfillment centers. The e-commerce giant has continued to pursue suffering or failed mall properties throughout the COVID-19 pandemic, as well.
Amazon isn’t the only company interested in using retail space as a means to create industrial supply. About 60 new retail-to-industrial conversion projects are currently on the books. These projects will contribute about 15.2 million square feet of industrial space to the U.S. real estate market.
3. Blighted Properties
While grabbing up an old and broken down factory and updating it for modern use seems like a logical choice, these projects have a high price tag attached. The high cost of renovating or razing and rebuilding blighted industrial properties keeps many potential industrial developers away. Aside from the high cost, these types of buildings come with other challenges, such as:
- The original property owners have ignored these blighted properties for years or decades. Often, local governments seize them due to unpaid taxes or various other reasons. If not, they may need to get seized before a developer can buy them.
- The longer a property remains blighted, the more damage it does to the land it sits on. Urban blight often results in heavy ground pollution that requires clean-up before a new facility can get built to mitigate risks to construction crews and future employees on the site.
- Urban blight tends to attract criminal activity. As a result, the initial phases of an urban blight remediation project may pose unique dangers for industrial developers.
Some industrial real estate organizations regularly take on blight remediation projects as a form of community service. Phoenix Investors has undertaken blight remediation projects in several locations, including a large manufacturing parcel in Flint, Michigan; an abandoned warehouse in Milwaukee, Wisconsin; and other sites across the nation. Many of these projects have been parlayed into larger, community-driven initatives through local governmental support and grants for funding neighborhood rehabilitation. As industrial real estate remains scarce, however, industrial developers may become more willing to invest in blighted properties.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.