Alex Cohen, chief executive officer of Liberty SBF, reviews current trends in demand for warehouse and industrial space, and how owners are acquiring financing in difficult times.
Demand for warehouse and industrial space remains robust across the country, with continued rent growth and higher prices per square foot, says Cohen. The capacity crunch has been driven by the fallout from COVID-19, as well as a general rise in e-commerce activity over the past few years and resulting supply chain congestion.
The situation is especially acute near major port areas, such as Southern California’s Inland Empire region, which supports the ports of Los Angeles and Long Beach. The same is true for parts of the country that are close to ports along the East Coast.
Cohen sees a shift in the dynamic between end-users of industrial properties and real-estate investors, with the latter beginning to eclipse the former in bidding for space.
A further trend in the market is the changing nature of the warehouse itself. In addition to the traditional regional distribution center, which might take up a million square feet or more, there’s growing demand for smaller facilities located closer to urban centers. That’s another result of the e-commerce boom, as retailers look to meet customer demands for rapid delivery of orders.
At the same time, says Cohen, many developers are reducing the portion of their properties devoted to office space and increasing that which is intended for warehousing and distribution use.
Opportunities also exist to convert retail properties into warehouse complexes in major metropolitan corridors, even to the extent of turning entire department stores or malls into distribution centers. But developers can run into re-zoning problems as they confront issues of traffic, congestion and noise close to residential neighborhoods.
The Small Business Administration has been a major source of interest over the past 18 months, administering the Payment Protection Program loans that served as a lifeblood for many enterprises to guide them through the pandemic. But the expiration of the PPP does not mean the SBA has run dry as a resource.
The SBA has made some changes to a few of its loan programs that can be utilized by service center operators to take advantage of the red hot market for warehouse facilities in the commercial real estate sector.
Dating back before the pandemic, real estate values for industrial spaces have been among the best gainers, says Alex Cohen, CEO of Liberty SBF, a small business lending company. Such a dynamic creates an interesting opportunity for service center operators, many of whom own the land they occupy.
The current conditions lead to a number of questions, Cohen says. “‘How do I take advantage of assets I already own?’ ‘How can I grow if I need to?’ ‘What are the best options for a financing standpoint?’ ‘Should I be refinancing now?’ We’re having a lot of these conversations with those borrowers and intermediaries who are looking at those types of decisions looking to navigate the landscape today.”
Let’s get to the last question first. If refinancing is something an owner-operator is considering, Cohen says now is the time to pull the trigger. Two separate changes to the rules by the SBA have made refinancing particularly attractive.
Regarding the 504 program, Cohen says property owners can use an SBA loan to refinance debt, even if they have only owned the property for a short period of time. “If you get a fresh appraisal, and have equity, you can get a quick, low-cost financing vehicle to pull cash out. You can really take advantage of values going up without overextending yourself or having to sell the property.”
A more niche route, but one that is an outstanding opportunity for companies who qualify, is the change that allows companies to refinance existing government debt, a situation that never existed before. For instance, the SBA’s 7A program has historically been used as a high-leverage option in real estate, but it comes with a floating rate loan. With the new rule in place, companies can refinance from one SBA loan to another, switching out the higher cost floating loan to a fixed rate loan.
“We’re doing a lot of these refis right now. It’s really a no-brainer. You lower your monthly payment, you pull cash out, and all of your costs and fees get capitalized,” Cohen says.
Refinancing, of course, isn’t the only option on the table. And the SBA has worked to provide some new avenues for warehouse operators.
In addition to the refi element of the 504 program, the loan can be used to acquire real estate in the confusing market. Borrowers can finance up to 90 percent of the property with an SBA loan, compared with 65 to 70 percent LTV on a conventional loan. And it’s done in the confines of a low-cost, fixed-rate loan.
“If you’re purchasing real estate, especially in an environment where prices have increased significantly, it’s a way to reduce your cash equity injection into the financing because it’s only 10 percent down. It’s a huge difference compared with conventional financing, and it’s also relatively cheap compared with conventional financing.”
The solution also works for companies currently leasing properties, particularly in the face of increasing leasing rates. The availability of the 10 percent down aspect can help push the scales in the lease vs. buy equation.
How long this situation lasts is a question mark. With inflation percolating, the Fed will be looking seriously at interest rate hikes, which will put some negative pressure on asset prices.
“While we’re keeping our eye on inflation and keeping our eye on rates, you have a supply-demand imbalance with much stronger demand than supply for warehouse industrial properties. There aren’t many ways to take advantage of the value in that property,” he says.