When Craig Meyer was elected president of the 3,000-member Society of Industrial and Office Realtors in November 2008, he knew he was taking the helm of the brokerage organization at a challenging time. Meyer is a 30-year industry veteran who started his career as an industrial specialist in the Los Angeles International Airport area in the 1970s. He has worked with institutional and corporate clients including BP, Morgan Stanley, Nike and Xerox.
Based in Los Angeles, Meyer joined Jones Lang LaSalle nearly three years ago to grow its industrial group. Today, he leads a team of 200 professionals in 34 markets across the United States. While the industrial property market has been a steady performer through much of the early stages of the recession, recent data points to rising vacancies in many major markets. NREI recently spoke with Meyer about the year ahead for the industrial sector.
NREI: Industrial is showing signs of significant stress. Why?
Meyer: The real driver of stress is the downturn in retail sales. As the retailers are closing and selling less product, the demand for warehouse space over the long run will decline. As this year evolves, you're going to see sublease space grow a bit. Certainly, leasing activity is down significantly. But relative to Class-A office space in financial centers, we are not going to be punished nearly as much. The real tempering factor on industrial is the fact that we have very little new construction occurring right now.
NREI: What are the advantages and disadvantages of the industrial sector?
Meyer: Typically there are longer lease terms of five to 10 years. There is typically less multi-tenant risk. On lease turnover there is less capital expense to do improvements. Also, the port cities on both coasts and the inland ports, such as Chicago, Dallas and Kansas City, have all enjoyed growth in the logistics and warehousing properties as our overseas trade has increased dramatically over the last 10 years.
The Inland Empire, probably the weakest industrial market in the United States, was a high-octane market where you had a lot of construction. It was absorbing 25 million sq. ft. a year. As retailers perfected their supply-chain strategies and moved into larger regional distribution centers, they demanded larger buildings. In response, industrial developers put up facilities ranging from 500,000 to 1 million sq. ft. Now those large buildings in excess of 500,000 sq. ft. are the weakest segment nationally.
NREI: How are industrial REITs holding up?
Meyer: They are doing better than the market might reflect. These firms are really best in class. They were really smart about the markets that they entered. Some of their issues are due more to financial structuring than the responses of the market. Generally, ProLogis, AMB and the others are significantly undervalued versus the assets that they hold.
NREI: ProLogis will sell 33 million sq. ft. nationwide to trim debt. Will the sale set a new benchmark in pricing?
Meyer: It's hard to say, but there are more than 75 different potential buyers who either want to buy pieces, or all of them. The pricing will be better than the market expects. It's hard to duplicate those assets. It will be lower pricing than a year ago, but it will not reflect fire-sale pricing or desperation pricing.