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2025 Trends: West Coast Industrial Real Estate Insights · Industrial Advisors

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  The owners that either have no debt or and or have a low basis, they're buying deals.
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  They're just buying occupancy to live to fight another day.
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  And there's actually been a couple of acquisitions recently in the I. E. that.
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  Where people, their business plan is we're going to buy this at a great
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  basis, and we're going to do a really cheap, ugly deal for two or three years.
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  Welcome to our industrial advisors podcast.
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  You have Bill Condon and Matt McGregor, and we have Mike Kendall joining us today.
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  Mike is, uh, leads our investment team on the West coast for industrial at Collier's
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  and does a great job, has a great pulse on kind of everything investment wise.
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  Uh, the.
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  That is going on on the West Coast.
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  So Mike, thanks for joining us again.
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  I think this is probably your third time joining us on this podcast.
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  I think so.
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  Hi guys.
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  Thanks for having me.
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  Welcome.
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  Thank you.
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  Absolutely.
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  Appreciate it.
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  By the way, Mike, you don't know this, but your last show trended our,
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  uh, most listened podcast in 2024.
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  Wow.
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  Look at that.
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  No pressure though.
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  Right?
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  That's right.
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  Everybody was wondering what was going on in 1024, right?
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  Where are all the sales?
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  Yeah.
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  So let's, let's, let's talk about 2024.
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  How about just giving us kind of a high level.
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  Overview of what happened in 2024 across the West Coast from an investment
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  standpoint on the industrial side.
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  Yeah, so 24 was, was basically like the, the mirror image
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  of 23, kind of the opposite.
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  So 23, 1st, half of the year, quite strong 2nd, half of the year.
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  Sales fell off a cliff, and that was the beginning of the volatility of the 10
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  year and kind of the rise of inflation.
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  And so 24, that volatility that reared its ugly head at the 2nd, half of 23.
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  Continued into the, you know, into 24 and so volume in the 1st, have a 24
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  was still off pretty considerably and then things picked up and actually the
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  2nd, half of the year was pretty good from a volume standpoint from my team's
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  perspective, especially we did, you know, we had a good 2nd, half of the year.
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  Overall, from from again, from my team's perspective, I think we're a pretty
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  good proxy for the overall market.
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  We were our volume was up over 23 volume about 15%.
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  23 volume was down about 35 percent from 22.
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  so we're not back to 22 volume yet, which was everyone's kind of
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  best year was 22 in our business.
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  But I do expect 25 to be again, slightly better than, than 24.
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  So we're trending in the right direction, but not without its struggles,
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  which we'll certainly get into.
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  You talk about the numbers on the whole Western region.
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  Let's talk a little bit specifically about Seattle.
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  So 2024 was actually a good year.
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  We bounced back about two and a half times the volume of 2023 for just under 1.
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  2 billion and the average per square foot was 233 through Q1.
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  This was a very good Q1 here for just under 250, 000, 007 transactions,
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  but a big drop, Mike, as we discussed on per square foot down to 201.
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  Is, are you seeing that kind of across the boards that Kind of a drop we are.
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  Yeah, we're seeing, and what's really driving that is the weakening leasing
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  fundamentals, rents are falling and we all know what happens when rents fall.
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  Obviously that income is capped.
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  And so that's caused quite a bit of.
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  Deterioration and value, and it's not equal across all the markets.
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  For instance, Las Vegas is a good example.
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  We have a couple of of I would call notable portfolios on the market today.
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  That really give us a finger on the pulse.
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  We have a 1, 000, 000 square foot portfolio in Vegas for link.
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  We have a 2, 000, 000 square foot portfolio for center
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  point in the Central Valley.
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  And the leasing fundamentals in Vegas have weakened.
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  Uh, they held up better kind of through 24 than a lot of other markets.
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  And so capital interest in Vegas was very strong in 24, but fast forward into 25.
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  There's still a lot of interest in Vegas.
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  Everyone likes the market long term, but with the decline in rents and decline in
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  leasing velocity, especially in North Las Vegas, Investors are building in a little
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  more safety into their underwriting.
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  And so that's pushing values down and same thing.
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  It has happened in the Inland Empire.
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  That's kind of the bellwether for the whole West Coast.
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  Rents have fallen in the IE probably more than anywhere else in the country.
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  And so that's pushed values down dramatically.
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  You know, we set our team, set the high water comp in, in
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  the Inland Empire in early 23.
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  And actually, you know, I'm sorry.
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  Mid 20.
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  Two with the closing of the, these two deals and they
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  were both one was 525 a foot.
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  One was 527.
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  Wow.
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  You can pin that as the absolute peak of the market and those buildings,
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  especially one of them, which was one of them was a user sale.
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  So a little bit of an asterisk, the other one, the 525 a foot Coca Cola
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  leased in the IE West in Fontana.
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  If that building were brought to market today with the same
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  lease in place, same everything.
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  Instead of 525, it's probably a 300 a foot building.
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  Wow.
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  I would have guessed that number.
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  When you were saying that, I bet I was thinking it's probably a 300.
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  Yeah, and it might even be high twos.
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  And so that's, that's what's happened.
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  And it's all based on market rent.
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  You know, we, we peaked in the market at market rent of maybe 1.
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  80. For the best of the best in the West and now we're everything's now
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  gone to gross and so when you do a net equivalent in the West, maybe you're
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  at a dollar 10 from a dollar 80.
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  So you do the math that's a pretty big drop and we went from
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  a dollar 40 down to 80 cents.
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  So.
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  It's, you know, so that is a direct translation to values.
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  Uh, when people, you know, I like to say that the risk pendulum has swung kind
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  of too far over and investors right now, in my opinion, are overpricing risk.
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  And that could be credit risk, that could be vacancy risk, that could be
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  kind of location or functionality risk.
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  Anything to do with risk, they're just, they're building in a lot of safety.
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  And so that's, you know, directly translating to, um, And what markets on
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  the West would you say are really, uh, driving the interest from the investors?
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  Where are people getting excited?
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  Well, so it's again, it comes back to a couple of things.
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  Number one, leasing fundamentals.
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  And so as an example, uh, Portland right now, and you guys know, because
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  Portland always drafts off of Seattle, Portland has the second lowest vacancy
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  rate of the whole West Coast behind LA.
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  And, and then when you dive into certain sub markets in Portland,
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  some of them are down to 2%.
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  And so Portland is actually doing quite well.
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  And we actually have a property on the market in Portland with Jerry
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  Mattson, a brand new Class A building, 10 year lease in West in Hillsboro.
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  And it's getting really good traction, good engagement with
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  the investors because the leasing fundamentals are strong and healthy.
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  And we're not seeing rent declines.
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  We're still seeing rent growing in Portland.
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  So that's that's an example of a market that is on a lot of
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  people's radar because of that.
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  The East Bay in Northern California.
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  Also very desirable, did not, rents did not grow as much there
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  as they did in Southern California.
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  So they, they really haven't, I mean, they've softened,
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  they're not growing again.
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  They may be falling a little bit, but not anywhere near Southern California rents.
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  So the East Bay is also on everyone's shopping list.
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  Pretty much every investor is underweighted kind of East Bay
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  infill, uh, Northern California.
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  Reno is, is, Suffering some of the same challenges from a leasing perspective
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  that Vegas is and so there's a lot of interest in Reno and Vegas, but
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  just at a different price point.
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  I would say Phoenix is actually performing quite well a Phoenix really
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  in the last couple of years has.
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  Definitely move from a secondary to a primary market.
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  You know, it's now over 600 million feet.
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  So it's the same size as the Inland Empire and growing.
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  I mean, they're building, they're adding more space there than they
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  are in the IE. More leasing activity and net absorption there in the
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  last 2 years in the Inland Empire.
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  So it's, it's been interesting to kind of watch that transition
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  in front of our, our eyes.
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  Yeah, there's certainly a lot of construction going on there in Phoenix.
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  I'm curious, you know, we.
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  Over the past few years, short term waltz was always where the most aggressive money
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  was, was, was at, was chasing, right?
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  Have you seen that shift at all from investors to wanting some more stability
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  now with vacancy rates being up?
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  I mean, there's still, the most money out there is definitely value add.
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  There's just a lot of value add capital that wants to place.
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  The interesting thing to watch is value add can be very different
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  depending on who you're talking to.
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  I mean, we, we have seen, I mean, the traditional value add money is kind
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  of mid to upper teens on a levered IRR, probably tending more towards
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  the mid, you know, 15, 16%, but.
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  We've talked to some, some investors who have value add capital that are solving
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  to an 11 or a 12 on a levered IRR.
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  So that to me is more core plus, but they're calling it value add.
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  So you really have to lift up the hood and really dig into it to
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  really understand what people want.
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  But to answer your question another way, they still like that shorter term
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  Walt story, two to three year Walt, I would say three is better than two.
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  Depending on the markets, because right now, if you're in a soft
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  leasing environment, two years isn't enough to kind of get through
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  the softness, but three is good.
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  Three to four is actually probably the best right now.
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  But again, depending on the sub market and depending on the size of the
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  buildings, the leasing assumptions are getting more conservative.
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  That's where people are getting, building the safety into their numbers
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  is, Hey, if I can buy this at this number below replacement costs.
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  I have adequate lease up time frame and adequate dollars for
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  free rent and TI's and everything.
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  I'll buy it.
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  We're seeing that for sure.
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  And last year, uh, to Bill's point, money was on short term Walt and it seemed
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  like nobody wanted a long term lease.
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  How does that look for leases that are eight to say 12 years or longer?
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  Is there, is there money back in that segment at all?
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  There is and so there's 2 different profiles of deals that that kind
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  of have that characteristic.
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  Uh, 1 would be core, you know, class a at market rent.
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  With, you know, 8 to 15 years of lease term, there is some core money out that
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  is looking for that credit matters again.
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  And so if you have credit and you have class a, and you're in a good
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  market, so that that's the caveat is the core money right now, by its
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  very nature is the most conservative capital are very focused on certain
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  very safe markets in their opinion.
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  So, you know, very infill barrier, high barriers to entry, highly
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  desirable primary markets.
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  That's where they're and they're not straying from that.
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  Yeah.
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  That's a strategy and then the other bucket of capital that's targeting
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  that type of structure is, you know, if you have significantly below
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  market rents, but you have a lot of lease term historically last couple
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  of years, that's been very, very hard to capitalize, but there are some.
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  And this is mostly, I would say, ultra high net worth family offices that
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  have a very long term horizon that are starting to realize if they can
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  buy something at huge discounts or replacement cost, but they may have
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  to wait 7, 8, 9 years to get a return that's actually accreted with debt.
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  So, you know, they may buy something with a 4 cap.
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  And it's, it's below a five cap for seven, eight years.
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  That's really hard for a traditional real estate buyer to buy.
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  But some of these family offices can, as long as they can get their total return
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  in kind of a 12 to 15 year hold, they're getting an incredible buy, a basis buy.
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  So, and I just talked to a group yesterday that, that added that
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  capital to their, one of their buckets.
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  And uh, I think they're going to get some interesting opportunities because of that.
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  And speaking of cap rates, what's your projection kind of Class A
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  stabilized short term Walt Class A and then say more Class B type product?
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  Well, so, so the, you know, everything kind of prices off, of course.
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  Uh, so what would a, a new Class A with term at market good credit?
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  What would that price?
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  And then everything prices off of that.
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  And I would say for the, the, you know, the core markets of Seattle,
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  Southern California, now Phoenix, that is, you know, probably.
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  Right.
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  You know, low five.
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  And there have been a couple of trades in Southern California that fit that category
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  that were like a five spot on the biggest question is really, is it at market rent?
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  And so if it's truly at market, that's where I think it is.
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  It's, it's, you know, five to five and a quarter.
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  Maybe if it's a highly unique, super, super infill, you could
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  drop into the high force.
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  And that's with again with term everything else and then you start to look at the
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  shorter term wall and it's all dependent on where that rent is to market.
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  We're seeing some things even in the threes if it stabilizes in 2 or 3 years
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  or 4 years to, you know, a 6 and a half.
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  That's kind of the, I would say the minimum that people need to roll
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  it to to justify the below market yield up front and end up from there.
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  We've seen some, some.
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  Um, You know, deals that will, you know, like the center point deal is,
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  is certainly going to be a low for going in, but it's going to, you're
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  going to get above a 7 in your 5.
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  So those are interesting metrics for people, especially if you can
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  get it below replacement cost.
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  Yeah, you know, Matt mentioned earlier, went through some of the stats in
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  our market of the price per square foot being down to, you know, call
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  it 200 bucks a square foot right in this market, which is opportunistic
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  for for certain investors, right?
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  Given where where things have been.
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  So I think there's, you know, the first half of this year, certainly, and maybe
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  even into the second half, there's going to be some real opportunity for investors.
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  Where do you see some of those opportunities?
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  It is.
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  Up and down the West Coast for investors as, as they're
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  looking to play some capital.
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  Well, yeah, I mean, the basics matter again.
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  I mean, that's kind of what I see this market is going back to basics
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  and real estate 101 credit matters again, location, functionality,
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  all those things are important.
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  And, and, and, you know, two, three years ago, it didn't, everything
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  was pricing the same, regardless of whether you had credit or not.
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  And so, and it was kind of a frothy, you know, throw the underwriting
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  out the window kind of thing.
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  And so I think long term, it's healthy to get back to the basics.
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  And so where are opportunities?
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  You know, again, I personally think that risk is being overpriced.
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  And so buying some vacancy in strategic locations, I think you can get a good
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  buy there because again, everyone is kind of Overpricing that lease up risk and
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  so, you know, basis is super important that you can buy a building at a really
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  good basis, even if it's vacant, I think, and we're starting to see green
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  shoots in leasing in certain markets.
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  Central Valley, Central Valley is, you know, was really slow in 24, especially
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  over 100, 000 feet or over 200.
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  Now there's 4 or 5 deals kind of above 400, 000 feet that are all circling that
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  when those things actually print, yeah.
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  People are going to go, holy crap, you know, this is a lot better than I thought.
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  And so like Inland Empire, again, the epicenter of carnage from
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  a rate decline perspective, but the volume is actually very good.
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  And so you need that volume to kind of churn through the vacancy.
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  I think it's going to actually bottom sooner than a lot of people think.
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  And so right now I see some opportunity buying vacancy in the
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  Inland Empire because of that herd mentality of people like, I don't
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  want something vacant right now.
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  And as you all know, everything is not treated equally.
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  So you don't need to wait for the vacancy to drop to 4 percent
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  for it to have a healthy market.
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  It's when the good stuff leases.
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  And you're left with the bad stuff.
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  And as long as, um, there are not a lot of good options remaining, you're going
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  to start to see construction, and people are going to scratch their head on the
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  surface thinking, why are people building when there's still 7 percent vacancy?
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  Well, it's because the stuff that's left is not very good, and tenants
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  want choices of good product.
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  Yeah, the class A stuff definitely leases first.
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  For sure.
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  And so another opportunity, I believe, is buying some land right now, as
• 17:05
  long as you have patient capital.
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  That's the, that's the critical nature there, because it may take a
• 17:12
  little longer to absorb, but there's a definite gap in deliveries in
• 17:18
  every market across the country.
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  And as we all know, it seems like the 1st 1, the early movers.
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  Turbulent times are the ones that get rewarded.
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  And so, uh, it's really hard right now.
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  We do it and we're, we're hired to do some equity races on some spec
• 17:35
  development, but I do think that the ones that can buy into the story and
• 17:41
  really, um, get in early, uh, are going to be very well paid for that.
• 17:46
  That's well said.
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  Cause we're, we're selling a couple of pieces of land right now.
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  And I was quite surprised with how many offers came in more than we
• 17:53
  would have on a building right now.
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  And so, clearly, people are thinking the way you're thinking.
• 17:58
  Yeah, as long as you have, again, patient money and some time.
• 18:02
  That's right to, uh, to make sure you're, you're being thoughtful about it.
• 18:05
  Uh, that that's where I think people are going to make a lot
• 18:08
  of money in the next cycle.
• 18:10
  That's right.
• 18:10
  Last question for you, Mike.
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  I know this is up and down the West Coast.
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  It's certainly prevalent in Seattle, where we have a ton of vacancy in the
• 18:17
  one to 250 range, 57 options in Seattle.
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  And I know the Inland Empire has the same problem.
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  How would you be advising clients right now?
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  Would you be advising them?
• 18:27
  Obviously, to your point, people are really being.
• 18:31
  Pricing in a lot of risk on those.
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  So how are you advising clients that are wanting you to underwrite
• 18:37
  those buildings right now?
• 18:38
  Hold them and try to lease them.
• 18:39
  But, you know, what's your advice?
• 18:41
  Yeah, I mean, a lot of it depends on the owner's basis.
• 18:45
  What we're seeing a lot, especially in the Inland Empire, and you're probably
• 18:48
  seeing it in Seattle too, is The owners that, um, either have no debt or, and, or
• 18:54
  have a low basis, they're buying deals.
• 18:56
  They're just buying occupancy to live to fight another day.
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  And, and there's actually been a couple of acquisitions recently in the IE that
• 19:05
  where people, their business plan is we're going to buy this at a great basis.
• 19:08
  And we're going to do a really cheap, ugly deal for two or three years.
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  And then by the time that lease rolls, the market's going to be stronger.
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  And then we're going to move the market rent up.
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  And then sell it.
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  And so, uh, yeah, if you can.
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  Buy the deals, just get occupancy, get some cashflow, but do short term.
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  And that's the biggest thing we're seeing.
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  There's a lot of, you know, very savvy tenant rep brokers out there that
• 19:33
  are advising their clients to go long term on leases and we have a lot of.
• 19:39
  Developers calling us with the leasing broker saying, here are some proposals.
• 19:43
  What do you think?
• 19:44
  And I keep really trying to advise them against doing a long term
• 19:48
  lease because you're locking in that diluted value, right?
• 19:51
  Um, and, but they're like, but this building's been vacant for
• 19:55
  18 months or, or, you know, we're just delivering it, but there's no
• 19:59
  other deals on, you know, out there.
• 20:00
  We need, we're getting nervous and I'm like, do what you can.
• 20:04
  But I understand you have to cover your nut, but do whatever you can
• 20:08
  not to lock in these law, these really low rents for long term.
• 20:11
  It just, it's such an impact on value.
• 20:14
  That's right.
• 20:15
  Well, as always, you are fascinating and a wealth of knowledge.
• 20:20
  We'll put your contact information in the footnotes for anybody that
• 20:24
  needs pricing on a building or some advice contact Mr. Kendall.
• 20:28
  Uh, he's here for you.
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  I appreciate your time and being on the podcast, Mike.
• 20:31
  Thanks a lot.
• 20:32
  Thank you guys.
• 20:32
  Always a pleasure to talk, uh, shop with you guys.
• 20:35
  Appreciate it.
• 20:36
  Thanks, Mike.
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  Great job.
• 20:37
  Thanks.
• 20:37
  Have a good one.
• 20:38
  Good job.
• 20:39
  All right.