Microbay Industrial
Those in industrial all know what small/large bay industrial buildings are. But does anyone know of any shops specializing in acquisitions or even development in more of a microbay building?
As an example, Aggregate GLA is maybe 25,000 sf across 5 buildings, each tenant is +/- 1,250 sf. With some bigger tenants taking up a few adjacent units. Other properties could be upwards of 75,000 sf but all tenants are still in that 1,200-5,000 sf range.
Seems to be very similar to that of multifamily or office. Tons of smaller tenants, more management intensive, but turnover capex should be less comparatively, high demand for these smaller spaces (have seen it firsthand), and most of the time you’re getting higher rent on these smaller
Units than if you’re renting 10k+ sf. Downside is most of these rents will be Gross + utilities, unsophisticated tenants won’t understand NNN rents and all the comes along with it, or want to deal with it.
I guess my question is two fold, anyone know of shops specializing in this and at a high level, what are your thoughts or where do you see pitfalls?
My firm has some of the small/micro bay industrial (2k-5k sf range for suites). You're correct on all fronts. Demand is higher, rents are higher by 5-15 cents psf/mo, tenants are unsophisticated so you're either struggling to explain NNN's or you're doing MG leases (though NNN lease structures seem more and more common so less heartburn from tenants), and management is more intensive on the A/R collections, admin, and PM fronts.
I guess all I'd add is that, at least in the PNW, this product is underbuilt and the 100k sf bombers are overbuilt. This might be of interest to you given you're a developer.
This is my favorite asset class
Given the lack of sophistication among tenants in the 1,250 sf to 5,000 sf demand segment, is pre-leasing less common for microbay spaces? Is this generally developed on a speculative basis, where aggressive pre-leasing efforts commence near delivery like multifamily? I agree that this is an interesting segment within the industrial sector. Curious how a developer could mitigate front-end risk and secure higher LTC construction debt.
Deals are fairly short term 2-5 years but you can get some pre-leasing done. You build spec but at a certain stage start to market (think multi). Unfortunately, debt is certainly the biggest hurdle. Given they are smaller check sizes likely would take it down un-levered and put debt on once stabilized. If you do this a few times and portfolio exit it could be cool.
Not a pitfall per se, but the issue I think is that these are smaller deals so they need to be done with less overhead. If you're doing a 200,000 SF building you can afford a bigger team with more layers of management between the guy with the idea and the guy holding a shovel. But for the small deals, you need to be leaner and meaner than your average developer is willing or able to be (that's why these are underbuilt).
In my observation, a lot of times the people who actually build small industrial projects are guys with a hand in the construction industry. Think: a local site work sub who finds an off-market piece of land through a friend, gets it permitted because he knows people on the local boards, GCs the work himself, and self-performs some of the site work. That's how to do a small industrial project without blowing the budget.
What type of tenants would occupy units like these? Seems very interesting.
Local blue collar business... carpenter, small construction, landscaper stuff like that
Good product. Made me a lot of money. Not an easy product type to build because you can usually build the bomber stuff for cheaper PSF which is why its oversupplied.
Debt can sometimes be tricky given the low WALTs and non credit tenants.
Key is to have good leasing broker relationships and be able to get dudes who aren't native English speakers to feel like they arent getting ripped on your lease.
Avoid cannabis tenants at all costs. They will come depending on your state. They are all criminals. Sorry if youre not but we have gotten burned enough for me to think you are.
Also this product doesnt really work if youre a 'suit' kind of guy. You need to understand blue collar work and not act/look like a total jabroni.
Curious, how is this niche in larger markets? I am in SoCal. I have heard plenty of people talk about the 'contractor garage' asset class but they are in tertiary markets. I actually know a firm specializing in what OP describes but they are hunting in TX where it was described to me there a lot of this product sitting around. Not sure what the inventory is like in SoCal
I wouldnt call it niche at all. BX has a whole division dedicated to it. LA is the biggest industrial market in the world with huge demand. Works best in markets with tough land use regulations prohibiting new build and a lack of excess land.
When there is a lot of underdeveloped land and lax zoning many tenants just buy a plot and plop a metal building on it and call it a day.
Isn’t this just light and flex industrial? Lots of this product exists in the southeast. Heavy operations and 1-3 year lease terms. There are operators who focus on this segment because it is too operationally intensive for institutions to buy a 100,000 SF asset with 60+ tenants.
Yea not sure where OP got microbay from.... Makes it sounds like....
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