Industrial Getting Higher Dollar than Office in Post-Covid Era, SIOR President Says

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By KERRY SMITH, EDITOR, ST. LOUIS CONSTRUCTION NEWS AND REVIEW MAGAZINE

In a turn of events brokers have not seen in more than a quarter century, brokers are seeing industrial space bringing in a higher dollar than Class A office space.

Such was the message disseminated by Patrick Sentner, 2022 global president of the Society of Industrial and Office Realtors, as he presented at SIOR St. Louis’ 37th annual Metro Market Forecast event on March 9. Sentner, executive vice president in the occupier group at CBRE in Pittsburgh, said the phenomenon is a byproduct of the uncertainty as to companies’ near-future need for office space.

“We are going through the biggest change in real estate, on all fronts, in my 26-year career,” said Sentner. “The biggest question everyone is asking is, ‘When are we going back to the office, and what is it going to look like?’”

Of the two office space categories, the central business district and suburban, the latter is moving at the same consistent pace it has been for the past several years, according to Sentner. But the central business district of markets in the U.S. and globally, he adds, has been hit hard since 2020.

“It’s not a situation where leases aren’t getting done,” Sentner said. “It’s a situation where leases are getting done differently. We’re seeing trends showing 20 percent reductions in the amount of office real estate that groups are going to be taking.”

Office landlords are seeing rising rental rates with annual escalations and longer-term leases, he said, but to achieve this, landlords are offering large upfront free rent and much higher tenant improvement allowances so companies can build amenity-rich, collaborative spaces to meet with clients, bring their people back to the office and recruit more workers.

As office remains in flux, demand for industrial space – even older, less desirable buildings – is soaring, Sentner says. “The economics are blowing me away,” he said, sharing an example of a 50-year-old, not-yet-updated warehouse selling at a 2.23 percent capitalization rate. The cap rate is a real estate valuation measure that’s a ratio between annual rent income produced by an asset – such as an industrial building – to its current market value. Sentner also shared a recent example of an industrial broker who was receiving multiple offers of $8 million an acre for an old industrial site.

“This is not currently the scenario in St. Louis or Pittsburgh, but these are the trends that will eventually come our way,” he said. “We are now seeing office space going for less than industrial space.”

Leading the March 9 program was 2022 SIOR St. Louis President Steve Zuber, a principal at commercial and industrial brokerage firm BARBERMURPHY.

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