JACKSONVILLE, FL—What are the biggest challenges inking industrial leasing deals in Jacksonville today? And how do you overcome those obstacles?
Monte Merritt, senior director of Franklin Street’s Jacksonville office, offers key insights that could apply to any market in part two of this exclusive interview. You can still read part one, “Why Industrial Deals are Still Tough in Jax,” if you missed it.
GlobeSt.com: What are biggest challenges that you’ve come across handling industrial real estate leasing transactions? Can you give me specific examples from deals?
Merritt: The biggest challenge in handling industrial transactions is not finding the right location or facilityt’s—handling the lease negotiations and the lease language. This not only includes the Request for Proposals—where we negotiate the business term of the deal—but also the negotiating of the lease document itself.
In this sector, unlike office or retail leasing, we use specialized terms including Phase I, Phase II, and remedial cleanup. The wording and use of these terms is all a part of the lease negotiation process for industrial tenants.
Additionally, the industrial market faces environmental challenges more so than any other sector. While all sectors face environmental concerns, the nature of the industrial market—oil spills, underground water movement, petroleum uses, possible hazardous material transport, and/or storage of these types of materials—makes it a particular area of concern.
GlobeSt.com: How do you overcome those obstacles?
Merritt: There’s no substitute for knowledge and experience in handling these types of transactions. The best way to overcome obstacles is to build a team around you that also specializes in your sector and to know when to bring them into a deal when necessary.
These individuals could include real estate or environmental attorneys, land use professionals, civil engineers or water management professionals. Over the course of my real estate career I’ve built relationships and learned to leverage these connections, as well as specialized departments within Franklin Street, for my clients. When handling industrial transactions it is imperative you have the ability to bring these types of individuals to the table if needed.
GlobeSt.com: What trends have you noticed in handling industrial real estate leasing transactions?
Merritt: With the struggling economy despite recent improvements, tenants increasingly ask for an exit clause or termination right to be negotiated in their lease document. Landlords do not like this, as they can only book the lease for the definite term.
For instance, if a tenant needs to have a termination clause at the end of the third year in a five-year lease term, the landlord cannot book the lease for five years, no matter how strong the tenant might be. If the landlord wants to sell that building he/she cannot guaranty that stream of income to a potential buyer or investor, which will certainly effect what a buyer/investor might be willing to buy that facility for. Additionally, tenants will offer to negotiate a termination fee to have that right, should they need it.
GlobeSt.com: How do you expect the industrial real estate market to change in 2014 and how will that impact how leasing transactions happen?
Merritt: As the economy continues to improve and the vacancy rate continues to decrease, the industrial markets will see expansion in new construction and tenants. After a year of positive improvement it seems our economy will continue to rebound.
Investors have been active in the corporate/commercial markets since the fourth quarter of 2012. In 2014, interest rates will play an important part in the investment cycle that will affect all investors, developers and users who may consider acquiring their own facility.
While investors have been active, users are starting to acquire their facility as opposed to leasing. Some industrial markets are distressed more than others—meaning a user may have any number of financing vehicles to consider.
If lending rates stay low, users can look to their normal banking institution or maybe engage the SBA along with their traditional banker for aggressive rates. Owner financing may be an avenue depending on the market and asset.
Banks want to lend but the government is putting pressure on them to hold reserves. Specifically in Jacksonville, if construction stays dormant, absorption will continue to increase and therefore, landlords will be able to include rental rate increases. Download PDF