Hot industrial real estate market presents opportunity for manufacturers

Sale-leaseback option may be attractive

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At a time when investors are setting their sights on buying up industrial properties in southeastern Wisconsin, companies that own the buildings in which they operate stand to benefit.

James Barry III, president of real estate brokerage firm The Barry Co., said there are lots of prospective buyers out there who are willing to pay companies big money for their industrial buildings and in turn lease them back.

“I think it’s a good time to contemplate a sale-leaseback (transaction) because the demand for that type of investment product is as strong as I’ve ever seen it,” he said. “That is reflected in a larger number of buyers who are looking for that sort of product and are willing to pay competitive prices and very low capitalization rates for sale-leasebacks.”

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Milwaukee was named one of 14 U.S. markets that stand out as a strategic option for industrial real estate investors looking for opportunities outside of primary markets, according to a recent report from real estate firm CBRE. This is due to the region’s “booming manufacturing industry and excellent market fundamentals,” the report said.

The Milwaukee market’s industrial vacancy rate is at a cyclical low, while asking rates are at their highest level since CBRE began tracking the market, according to the report.

Specifically, the region has seen its industrial vacancy rate drop from 6.9% in 2013 to 3.4% in 2019, while average asking lease rates have increased from $3.72 to $4.25 per square foot during the same period. In addition, there has been more than 18 million square feet in positive net industrial space absorption in the region over the same period.

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“It certainly is an opportune time in the market for companies to monetize their real estate,” said Trent Poole, first vice president with CBRE’s Milwaukee office. “Industrial and manufacturing are kind of the darlings of the market right now.”

Poole noted two reasons for this: The current peak pricing exceeds the peak in the previous cycle, and most manufacturers are performing very well.

He added that investors are chasing yield. Whereas in primary markets yields are less than 5%, in Milwaukee they’re in the 6-8% range.

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While some companies have taken advantage of the market and used sale proceeds to reinvest in their business or expand, plenty are still opting not to sell, Barry said.

In fact, Milwaukee is unique relative to other metro areas when considering how many companies own their own buildings, he added. In many other cities, Barry said, about one-quarter of companies would own and occupy their own buildings while the remaining three-quarters would be leased.

“In Milwaukee, it’s reversed,” he said.

Poole said contrary to what some may think, it is better if companies sell their buildings while their financials are strong. Most companies are looking to monetize when they’re not performing as well and may leave capital on the table, he said.

One company that recently sold and leased back its building is Pewaukee-based Harken Inc. The manufacturer of marine hardware and accessories sold its 170,000-square-foot industrial facility, located at N15 W24983 Bluemound Road, to a local investor for $15 million. The property has an assessed value of about $9 million, according to Waukesha County records.

At the time the deal was announced, Harken said the building sale would help accelerate its growth. It was considering some strategic acquisition opportunities in its marine and industrial markets.

Barry, along with The Barry Co. senior vice president David Buckley, brokered the Harken deal.

Market drawbacks

Of course, the market presents potential issues for manufacturers as well.

This is particularly true for those looking to move or expand into a different or new building.

Barry said vacancy rates are as low as he’s seen, especially in areas like Kenosha County where vacancy is near zero. He noted there is some speculative industrial development happening, but not enough to relieve the demand in that area.

Not only is it a challenge to find existing product, building new also has its own challenges, such as rising construction costs, Barry said.

While there is certainly a shortage of land to develop in eastern Waukesha County, it’s easier to find sites ready for development south of Milwaukee Mitchell International Airport, Poole said.

But then there’s the concern of finding enough workers. In the Racine and Kenosha area more manufacturers are moving in, competing with large companies that are already established there, such as Uline and Amazon.

Poole said his office conducted a study of the labor market in the Racine and Kenosha area a couple years ago and found general labor rates increased 50% in a five-year span.

“We are seeing an increase in the cost of labor down there,” he said. 

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