The rapid expansion of the industrial sector is no secret. The country’s major industrial markets report historically low vacancy rates and deliveries of new stock simply can’t keep up with tenant demand. Even despite increasing economic headwinds, the industrial sector is showing few signs of slowing.
From suburban e-commerce distribution centers to urban manufacturing facilities, owner and tenant needs have changed and will continue to evolve. As a result, industrial property managers’ roles have become a key differentiator in terms of a building’s performance and returns. Commercial Property Executive spoke with Carrie Szarzynski, director of management services with NAI Hiffman in Chicago, about what’s in store for the metro’s industrial sector and how effective property management can turn the tide.
Chicago’s industrial market continues to expand, with more than 10 million square feet underway, according to Yardi Matrix. What are the main drivers behind this growth?
Szarzynski: Chicago is very well positioned for continued industrial real estate expansion because of its transportation infrastructure and access to consumers and labor. A number of new regulations are tightening transportation capacity nationally and/or making it more expensive. Everything from tougher electronic logging and drug and alcohol laws for truck drivers, to new clean fuel requirements for ocean vessels, are all increasing Chicago’s importance as a hub.
We are very optimistic about Chicago’s positioning in the supply chain. E-commerce needs are growing. Traditional manufacturers are expanding. Many of NAI Hiffman’s institutional clients are aggressively seeking industrial assets in this market due to its low vacancy, high tenant demand and lower-risk profile versus office product.
With our industrial property management services, we serve owners who have anywhere from one to more than 60 properties in their portfolio—primarily larger, 500,000-square-foot to 1 million-square-foot suburban manufacturing properties—but also suburban warehouse and flex space as well as urban warehouse, industrial and flex space.
Today’s warehouses are significantly different than those of only a decade ago. How have property management practices changed?
Szarzynski: Industrial owners are now placing much greater importance on tenant engagement as they try to attract and retain tenants. We’re more frequently delivering a tenant experience to businesses with multi-shift operations and larger labor teams. Some properties may have more complex automation or other newer infrastructure. Some employers may want services like food trucks to be called in for employees, workout rooms or lounges.
More and more industrial employers share the need to keep workers content. Major companies like Amazon in our region—as in many parts of the country—are employing lower- and higher-skilled industrial workers in record numbers, leaving a shortage for other companies.
Access to talent and labor continues to be a driver for industrial site selection. We make sure we are supporting that talent through our proactive tenant relations. Years ago, only office tenants received that level of attention. Our industrial property managers now use the same creativity, skills, education, talents and approaches for tenant retention, reporting and strategic planning to meet and exceed the demands of our industrial clients as our property management teams use when they run Class A office assets throughout the Chicago metro market. Tenant satisfaction and managing the asset to assist our leasing teams in attracting and retaining tenants is one of our key focus areas today.
Given your extensive background in both the office and industrial sectors, what are some challenges unique to industrial management?
Szarzynski: In addition to the employees, we want the building owner to be happy, whether it is an individual investor in our backyard or out of state, a REIT or other owner. Each might require something different in terms of reporting and accounting. We have owners in New Jersey, Boston, California and other places, all of whom have different demands.
When managing industrial properties, our teams have to understand the tenant use, hours, truck patterns and schedules. They also need to understand different building systems—for example, an office building doesn’t consider dock levelers, a turning radius, multiple docks, truck traffic and the many types of roofing systems due to the size of the buildings.
We also spend much more time understanding what is happening inside the space. Each industrial asset is different and we can better serve our tenants by understanding what they need from the building to enhance their experience and make sure we deliver what helps them operate most efficiently.
The exciting challenge of managing industrial assets is serving many remote locations at one time. That requires special skills in organization, technology tools and time management. We want our industrial managers out at properties and visiting tenants for 50 percent of their day, so having these skills and tools really makes a difference in our service platform.
What skills does an effective industrial property manager have in 2020?
Szarzynski: An effective industrial property manager can easily adapt to different situations, has great people skills, is capable of managing multiple assets and often multiple clients, and keeps everything running smoothly. An innovative and strategic thinker goes a long way especially if they manage assets with vacancy. Working with leasing teams to fill vacancies has grown into a key skill requirement for our teams.
How do management strategies between suburban and urban assets differ?
Szarzynski: Urban assets are typically older with more unique maintenance requirements. We manage properties that have unique features requiring specialized vendors. We also find that an urban tenant base occupies more office space than warehouse, based on limited truck parking and dock locations. We also see that our teams managing urban assets are dealing with more frequent vandalism, graffiti, trespassing and other security issues.
Tell us about one key way that technology has impacted operations at properties your firm manages.
Szarzynski: The most impactful technology that NAI Hiffman has implemented includes online work order, preventive maintenance and accounting technology tools that enable our managers to approve invoices and work orders, complete asset inspections and monitor tenant requests and responses, all while on the road conducting site visits and visiting tenants. Modern tech also allows us to remotely monitor vacant spaces using sensors for temperature and water intrusion, and security monitoring inside and outside the facility.
How have shifts towards higher energy efficiency affected management strategies?
Szarzynski: The biggest shift we have seen regarding energy efficiency has been in lighting systems. Most tenants, if not all, are moving to more energy-efficient LED fixtures—both interior and exterior. The paybacks and costs have come down significantly over the last five years.
How do you anticipate the role of property managers will change in the next five years?
Szarzynski: The sophistication level required of property managers will continue to grow, to keep up with the high demands of our clients and the increasing uses of technology. Understanding the financial impact of what we do as property managers and how we can increase value will continue to be more important as our asset manager clients look for additional ways to leverage the skills of their service providers. Those property managers who only think about building operations and the expense part of the P&L will lose value over time. Property managers who understand the larger spectrum of operations—how to enhance returns—will be more valuable to their firms and clients.
We will also see landlords taking on more responsibility for things currently being managed directly by the tenant. This means property managers will need to ensure the asset and its equipment is being protected properly on behalf of the owner. We are already seeing large firms using shorter lease forms with higher rates to cover the added services being provided that have typically been considered a tenant responsibility.