Focus On Big-box Users Leaves Smaller Tenants To Fend For Themselves

By MATTHEW J. WOOD
Cushman & Wakefield

"It was frustrating to see all of the availability signs and new construction, yet not find anything suitable for our needs," lamented Bill Clarke, facilities manager for Nissan Motor Corp. (USA).

Nissan began its initial search for a new training facility in the Kent Valley in October 1995. After numerous trips to Seattle to tour existing facilities, Nissan expanded its geographical boundaries and looked in the Northend and on the Eastside.

Still unable to locate an ideal facility at an acceptable price, Nissan returned to the Kent Valley, but now considered constructing a building to suit its needs. Nearly one year after beginning its search, Nissan negotiated a 16,000-square-foot build-to-suit in Van Doren's Landing in Kent. It will take occupancy of the new facility in May.

Originally, Nissan was looking for a 15,000 to 16,000-square-foot building providing dock-high and drive-in truck access, with a minimum clearance of 16 feet. In a market of more than 68 million square feet, what appeared to be a simple requirement became a long and arduous search that would

Most of the spec development in the Knet Valley won't accommodate small and mid-sized tenants. Photo by Skypix

take the better part of 10 months.

Why the lack of alternatives for the small to midsize tenant such as Nissan?

Part of the answer lies in the fact that the focus of recent speculative development has been on "big box" distribution facilities, catering to tenants requiring in excess of 50,000 square feet. This approach not only appeals to a larger tenant, but also satisfies institutional investors.

There are several factors which contribute to its appeal. First, the cost of construction is typically less on a per-square-foot basis. These facilities do not require as much glass storefront, tenant improvements, demising walls, landscaping or parking. Developers are able to achieve greater lot coverage and construct more rentable square footage with a high-bay warehouse.

Second, the institutional appetite for big-box distribution space is much stronger. In developing an exit strategy, many developers stick with institutional-grade distribution facilities that are selling at capitalization rates between 100 and 200 basis points below that of smaller buildings.

Finally, large distribution buildings are less management intensive. They have fewer tenants, less tenant improvements and not as much roll-over as smaller, multi-tenant facilities. Credit is often stronger with the large tenants and the re-tenanting costs are substantially less.

The majority of the speculative development currently underway in the Kent Valley consists of large-bay, warehouse distribution buildings. These buildings, due to bay sizes of 12,000 to 15,000 square feet, typically are not divisible to less than approximately 25,000 square feet. Even then, the space is long and narrow, with limited truck loading. There are currently nine projects under construction or recently completed that are in competition to land a large distribution tenant, yet none of them will ever accommodate the 10,000 to 20,000-square-foot, small to midsize tenant.

Like Nissan, some of those tenants are forced to go the way of the build-to-suit. One such company is Non-Destructive Testing (NDT). The firm currently occupies 6,300 square feet in Kent. It required 12,000 square feet and began a facility search in March 1996. After months of touring existing buildings and coming up short, NDT decided to take matters into its own hands. Property ownership had some economic advantages and would enable them to build a facility to suit their needs.

The company decided to extend its current lease and have a 22,000-square-foot building constructed at Southcenter Corporate Park. Having experienced firsthand how tight the market was, NDT was confident that it would be able to find a 10,000-square-foot tenant to occupy the remaining portion of its building. A preliminary commitment for the vacancy has already been secured.

In 1994 Security Capital Industrial Trust (SCI), a real estate investment trust and national developer of high-bay distribution facilities, purchased three parcels of land in Van Doren's Landing. SCI planned to build three large distribution facilities, similar to those it builds throughout the country. They have completed a 152,727-square-foot building on lot II and have plans for a 117,000-square-foot warehouse on lot III.

However, due to the site configuration of lot I, SCI was forced to break from its norm and designed a building that was divisible to 12,000 square feet, by default appealing to the small to midsize tenant. The 92,723-square-foot building was capable of accommodating up to five tenants and, with bay sizes of 52 feet by 150 feet, could provide a 12,000-square foot user with one drive-in door and four dock-high doors. Because of the lot configuration, there is more parking than normal for this type of use.

Ultimately, SCI was forced to build a more expensive building with less lot coverage, more parking, more landscaping and more tenant improvements than was anticipated. However, market conditions what they are, SCI was able to turn this all into an extreme positive.

By marketing the building to the small to midsize tenant, four tenants were secured within eight months of breaking ground, with a proposal out for the remaining 17,351 square feet. Three of the five tenants occupy between 10,000 and 20,000 square feet, and no tenant occupies more than 25,000 square feet.

SCI was able to lease the building quickly with tenants that required more build-out than usual, but who were willing to pay a higher shell rent cost than larger tenants. This gave SCI a better return than expected on what was once considered a more challenging lot that did not allow the SCI standard facility.

The interest generated by the spaces at NDT and SCI is indicative of how lucrative the market is for catering to small to midsize tenants. It is imperative that more options be made available to these clients; the alternative is these tenants will search elsewhere in the area or perhaps be forced to look away from the greater Puget Sound region.

One way of serving this market, constructing facilities to meet their needs, is challenged by the fact that there is a lack of available land in the Kent Valley. With a close proximity to major transportation routes and situated between the ports of Seattle and Tacoma, the Kent Valley industrial market has been hot property and continues to attract users and investors alike.

As demand remains strong and the supply of serviced land continues to diminish, market boundaries will continue to push south into Tacoma, Fife, Sumner and DuPont, where the supply of industrial land is plentiful. It may be that current land owners in the valley need to reevaluate their plans to build the more cost-efficient large warehouses and concentrate their efforts on developing build-to-suit facilities for smaller tenants who are willing to pay their price.

Matthew J. Wood is an industrial leasing and sales broker for Cushman & Wakefield.