Monday Morning Scoop - Industrial Occupiers Clamor To Buy Space As Rents Bite, Domestic Manufacturing Beckons

Industrial Occupiers Clamor To Buy Space As Rents Bite, Domestic Manufacturing Beckons

Owning might just be the new leasing for industrial occupiers thanks to the appeal of total control, the potential for long-term cost savings and a major push to make more products in the U.S.

Property sales to industrial occupiers zoomed up 32% last year, with manufacturers  increasingly at the front of the line.

And the trend is accelerating: Houston-based broker David Wang has seen a 250% increase in calls from manufacturers interested in buying industrial real estate since President Donald Trump announced sweeping new tariffs on April 2.

“Manufacturers, for example, auto parts, windows, shutters or some product needing to use machinery, like a cutting machine, they prefer to purchase a building,” said Wang, the CEO of PropNex Realty Group in Houston. “They put in a fairly big investment, sometimes even over [the price per SF] of the shell building cost.” 

National headlines indicate interest started piquing last year.

Biotechnology manufacturing company United Therapeutics paid $33M for a 96K SF industrial building in Durham, North Carolina, last fall. Glove manufacturer American Nitrile bought a 540K SF manufacturing facility in Ohio after leasing it for two years.

More recently, pharmaceutical company Eli Lilly announced this month that it is acquiring a manufacturing plant in Pleasant Prairie, Wisconsin, to produce injectable medicines. The company plans to spend $27B on four new production facilities this year.

Chicago is leading the pack, according to CBRE, with 188 occupier acquisitions in 2024. Houston saw 143 occupier purchases, and Los Angeles ranked third with 123 transactions.

Some of the interest Wang is seeing was prompted by Trump’s “Liberation Day” announcement of new tariffs earlier this month, prompting manufacturers to explore how they can bring more operations within U.S. borders.  

Others are looking at steep rent hikes or plan to sink significant money into facilities they want to preserve over the long term.

An occupier with $3M machines custom built for their space generally doesn’t see moving them as feasible, said Grant Hortenstine, a Houston-based senior vice president for CBRE. And since manufacturers are often foreign companies, they don’t have the U.S.-based credit profile to lease buildings despite being financially sound.

Hortenstine is working with a Taiwanese semiconductor manufacturer that plans to buy a 150K SF building and then spend more than $40M on machinery, robots and other equipment, he said. The company is opting to buy to protect that investment.

“These companies are very creditworthy,” Hortenstine said. “They have a lot of cash, but they’re international companies, so they don’t underwrite as easily for an institutional landlord.”

Yet manufacturers are just one segment of the increasing number of occupiers opting to buy industrial facilities.

While manufacturers tend to buy newer, high-tech buildings, the average age of industrial properties purchased by occupiers last year was around 50 years, CBRE Vice President of Global Industrial and Retail Research James Breeze said.

Those buyers are also picking up smaller buildings, with 55K SF being the average size of such properties purchased last year, he said.

Industrial occupiers still make up a relatively small margin of property ownership in the sector, but their volume is growing and that is expected to continue.

“A large portion of industrial real estate is investor-owned,” Breeze said. “So when you see that trend start to turn, and you start to see more users opt to buy buildings, it’s something to look into as to why that’s happening, especially in these uncertain times that we’re in.” 

CBRE’s report found that occupiers are opting to buy for numerous reasons, including long-term cost savings once a loan is paid off and potential appreciation of property value, making the purchase an investment. Buyers can also get tax deductions for mortgage interest, property taxes and other operating expenses.

Other major factors include no lease terminations or rental increases. That is especially important for industrial users that haven’t renewed their leases since before the pandemic. Rental rates began to surge in the wake of the public health event, and that growth has continued.

Tenants are getting renewal offers with rates that are 30% to 50% higher than what they’re paying right now, Breeze said. 

“With nothing changing on the building, and they’re just floored,” Hortenstine said. 

Provident Industrial, a division of the Dallas-based development firm Provident, sold its second development directly to a user in December. Ocean Kingdom, a seafood logistics company, bought the 139K SF Hall Road Distribution Center in Houston.

Provident is a merchant builder of speculative industrial projects, meaning most of its sales go to investors, said Christen Vestal, Provident’s industrial south central director of development. But Hall Road Distribution Center fronts a major highway in Houston, making it a fit for Ocean Kingdom due to its distribution and retail components.

Provident considered the company’s financial strength and capability to close just like it would for any buyer, Vestal said, including a hefty 20% deposit on the loan.

 “Essentially, when we go under contract with one of these users, we’re taking the property off the market,” Vestal said. “We’re taking away our ability to lease it.” 

Being able to plonk down large sums of cash speaks to the financial strength of industrial users and proves they have long-term plans to set up shop in the market they buy into, Vestal said.

Historically, the occupier acquisition market was made up of smaller footprint users buying 20K SF to 30K SF industrial buildings. Now, sales of 100K SF-plus buildings are becoming more commonplace, she said.

“Interest rates skyrocketing bolstered some of that because people are looking at their lease rate versus what they can buy it for,” Vestal said. “It’s becoming more economical for them to just buy the facility outright.” 

More than 21,000 industrial leases will expire in the next 36 months, with more than half in buildings constructed prior to 2000, according to the CBRE report. That could mean more occupiers search for buildings they can buy to avoid large rent increases and more investors choose to sell, Breeze said.

Numerous investors are choosing to sell older industrial properties rather than pour money into modernizing them, following the flight-to-quality trend, CBRE found in a separate report. 

“Why not sell it at a rate that’s significantly higher than what they originally paid for it?” Breeze said. “And then there’s more of a user base, whether they’re in manufacturing or whether they want to protect against rent growth, that’s more willing to buy. More willing sellers, more willing buyers.” 

All the new sales activity drove up the average national industrial sale price per SF by 5% last year, to $152.42, according to CBRE’s report. Still, the increasing share of occupiers buying industrial buildings does not mean investors’ financials have weakened, Hortenstine said.

“Landlords have plenty of capital,” he said. “It’s not a capital thing.” 

The trend is more attributable to an evolving tenant base, Hortsenstine said.

In Houston, for instance, the pre-pandemic industrial market was largely filled with finished goods, distribution and oil field manufacturing, he said. Now it’s attracting more tenants in technology, bulk products and other fields that need specialized equipment.

Companies rushing to onshore plants and other facilities will also support the owner-occupied industrial building trend going forward. 

“Those tenants need special things, and landlords are just not going to let them do those things to their buildings,” Hortsenstine said. “You put silos inside the buildings, have robots in there that are running 24 hours. It’s a very cumbersome, noisy process. Most of those users want to be in their own building, away from everybody else, which doesn’t lend itself to a lease.” 

By: Maddy McCarty
Source: BisNow