SC_MC-Vaught | Hurrell 2022 Year-in-Review - Unlisted

Expanded Geographies

With the evolution of the Central Florida market now encompassing both the I-4 and I-75 corridor, Marion (Ocala), Sarasota and Manatee Counties are fast growing industrial markets that are often included in the greater Central Florida conversations.

GREATER OCALA

Inventory: 27,746,162 SF (953 Buildings)

Direct Vacancy: 5.2%

Under Construction: 3,110,609 SF

% of Inventory Under Construction: 11.2%

PASCO & HERNANDO COUNTIES

Inventory: 17,310,872 SF (964 Buildings)

Direct Vacancy: 3.2%

Under Construction: 1,348,00 SF

% of Inventory Under Construction: 7.8%

AIRPORT

Inventory: 27,356,502 SF (1,307 Buildings)

Direct Vacancy: 4.7%

Under Construction: 394,595 SF

% of Inventory Under Construction: 1.4%

EAST TAMPA

Inventory: 79,706,687 SF (1,890 Buildings)

Direct Vacancy: 5.5%

Under Construction: 2,947,117 SF

% of Inventory Under Construction: 3.7%

PINELLAS COUNTY

Inventory: 61,820,370 SF (3,402 Buildings)

Direct Vacancy: 2.1%

Under Construction: 745,038 SF

% of Inventory Under Construction: 1.2%

Hernando

Pasco

Pinellas

Hillsborough

MANATEE & SARASOTA COUNTIES

Inventory: 47,554,427 SF (2,704 Buildings)

Direct Vacancy: 1.1%

Under Construction: 1,923,088 SF

% of Inventory Under Construction: 4.0%

POLK COUNTY

Inventory: 76,329,811 SF (1,623 Buildings)

Direct Vacancy: 4.1%

Under Construction: 4,327,662 SF

% of Inventory Under Construction: 5.7%

Marion

Polk

Sumter

Citrus

Manatee

Sarasota

Southeast Capital Markets

Leading the efforts for the Colliers Southeast Industrial Capital Markets platform, Ryan has expanded his expertise into some of the major markets listed below.

Our Opinions on the Market

Has the adoption of “The CFL Logistics Triangle” reached the end-user?

At the beginning of our most recent cycle, Tampa and Orlando were often considered independent markets with their respective tenant demand clusters. For the years following, the growth of Polk County’s industrial market allowed Central Florida (CFL) to coin the now nationally recognized “I-4 Corridor” – a 75-mile span running east-west across the center of the state from Tampa to Orlando. In the trailing 36 months, we’ve seen an evolution of how the Central Florida industrial market is defined as it expands geographically to include growing industrial territories such as Marion County (Ocala), Pasco County, and Sarasota/Manatee County. When combining this expanded geography, our market size now surpasses 500M SF.

2014 - 2016

Tampa MSA or Orlando MSA

2017 - 2019

“The I-4 Corridor”

Addressing the core question, yes, the end-user is recognizing the options to consider throughout “The Logistics Triangle.” Each occupier has their major driving factors behind site selection (end-customer, suppliers, labor, etc.), however, the geography under consideration traditionally depends on the target size of the facility.

What are the active occupier trends in 2022?

2020 - 2022

“The Logistics Triangle”

Requirement Size Geography Considered

700,000 SF & Larger The Logistics Triangle

300,000 – 699,999 SF I-4 Corridor

100,000 – 299,999 SF MSA Specific

99,000 SF & Smaller City Specific

1. Flight to Quality – Some of our more densely populated and built-out markets, such as Pinellas County and the Airport submarket, have seen little to zero new industrial product built in over two decades. With the trailing 5-year rental rate growth and the market’s positive net absorption, sites previously written off due to pricing or complexity have now come back into play. With newer product, occupiers that value – and can monetize - the attributes of a Class A facility are experiencing a flight to quality.

2. Speed to Occupancy – We discuss this every year, but the need for speed-to-occupancy has been even more exasperated by the diminishing available supply. With inbound goods arriving, overflow of inventory, or growing customer bases, occupiers are often being forced to compromise on quality, operational functionality, or total cost just to accommodate their businesses’ need to be operational immediately.

3. Short Term Leases – The majority of our tenant demand comes from either a) internal market growth with needs to expand facility footprint or b) relocation of an operation (from out of Florida) for more favorable work and labor conditions. With both of these buckets in high demand, there’s an increasing importance for flexibility in lease term or shorter-term leases.

Is supply outpacing occupier demand?

As we now look to evaluate the greater Central Florida Market as “The Logistics Triangle,” it’s important to address this question relative to both the submarket and design build (single-side load vs. cross dock).

In-Fill & Single-Side Load

When taking a static look at Hillsborough County availabilities over 50,000 SF, specifically the Airport and East Tampa submarkets, there are only 11 available blocks of space existing and only 4 buildings currently under construction. These 4 buildings and 11 blocks of space total approximately 1.8M SF of available space to accommodate all Q1 and Q2 2023 requirements. Comparing these statistics against the trailing 12-month absorption in these submarkets of 5.15M SF, there is a drastic supply and demand imbalance for infill warehouse product. This lack of available supply is allowing Class B/vintage product rent growth approach what is now being achieved in Class A/new developments.

Central Florida or Statewide

Experiencing quite the opposite impacts, Polk County may experience a wave of supply in 2023 that could potentially outpace demand. Looking at available blocks of space over 100,000 SF at the end of Q4, there are 14 buildings (totaling 4.3M SF) available today and 8 buildings (totaling 3.9M SF) actively under construction. Summarizing the blocks of space available for consideration for occupiers with mid-2023 timing, there are 22 blocks of space over 100,000 SF totaling 8.15M SF. Comparing these statistics against the trailing 12-month absorption in Polk County (2.15M SF), the market is seeing the inverse of our infill markets - a tenant favorable landscape for industrial real estate.

Bifurcation of Capital Markets/Leasing

Not in recent times has there been such a bifurcation within a marketplace like what is taking place now between that of the leasing environment and the capital markets environment. Beginning with evaluating the market through a leasing lens, when taking a broader national approach, the United States industrial vacancy rate at the end of Q3 2022 was 3.7%; of note, anything less than 5% is solely considered “functional vacancy”. Diving further into the Southeast region, that vacancy rate sits at 4.4%, elevated from the national average due to the large amount of spec construction currently taking place. Looking at absorption, the Southeast led the nation with over 2.5% of the total Southeast inventory absorbed through the first nine (9) months of 2022 where nationally, the second highest absorption rate as a percentage of total inventory was the Midwest region at 1.9% of total inventory. As a result of the aforementioned statistics, rents in most Southeastern markets have grown YoY by more than 12%. Said by a colleague of mine in the Charlotte office, “Vaught, there are still three to four tenants evaluating each vacancy compared to what we saw years ago where one tenant was evaluating four or five vacancies. This is still absolutely a landlord’s market.” So, as the local market leasing brokers and asset managers continue to report record setting numbers, those on the capital deployment side of the table are living a much different life right now. Approximately 80% of land sites under-contract as of April 1st have been dropped due to imploding proformas. Bid/ask spreads between buyers/sellers for existing assets has often times been wider than reconcilable. Mandates by capital providers on development yields seem to shift on a weekly basis. The fear of catching a falling knife and pricing being lesser tomorrow than it is today has kept many capital sources on the sidelines.

Forwards No More

LP Equity was forced to sit on the sidelines in 2021 and first half of 2022 due to the forward structure being the preferred execution by most merchant developers. The forward execution was the result of three variables that all worked in a manner that made this execution feasible. Those three variables, what we referred to as the three legs of a stool, were as follows: i) compressing cap rates, ii) rapid rental rate growth, iii) parabolic rise in commodity costs. As we exit 2022 and head into 2023, the question of whether a forward is still feasible is still often asked, but the economic environment has changed. Said differently, two of the three legs of the stool are no longer with rapid rental rate growth being the sole leg that still exists. Alternative structures are still being presented to limit a developer’s risk profile in a speculative development deal structure, albeit as mentioned in the opening paragraph, most proformas no longer work regardless of transaction structure.

Variables to Consider

The question of what the future holds is always an unknown, but as we look forward into the next twelve months of 2023, the crystal ball is fuzzier than normal. The success or failure of the industrial real estate industry seems to be more tied to the macro economy than in recent years as investors are evaluating copious amounts of data. Do equities rebound enabling tenants to commit to large capital projects? Does unemployment get to a level that is acceptable by the Fed? Where does inflation go? Do long bonds stabilize? Does the yield curve normalize and become un-inverted? Do construction costs subside from current levels? Do sellers acknowledge that we are past peak and therefore in a new pricing environment? Do we have a deficit of sellers or a deficit of buyers? Does net absorption remain at elevated levels therefore driving double digit rent growth? So the question of “how do we succeed as an industry” is a tough one to answer with an argument able to be made against any projection in 2023.

Is Mega Bulk Slowing Down?

Looking in arrears back to 2019, Central Florida (defined in geography by the boundaries of The Logistics Triangle) has seen ten leases executed that surpass 700,000 SF in total size – six of which were executed in 2020 and only two in 2022. However, five of the ten leases signed during this period have been with Amazon and 2022 has been the year for the Fortune 50 to recognize the population growth and address the subsequent demand for a mega-bulk facility to service the State of Florida. In addition to the two below mega-bulk leases signed this year, City Furniture finalized construction on an owned 1.2M SF showroom and distribution center immediately visible from I-4 in Plant City.

Fortune Ranking: 32

Signed: Q4 2022

Size: 1,383,296 SF

Developer: NorthPoint Development

Fortune Ranking: 35

Signed: Q1 2022

Size: 1,204,632 SF

Developer: Blue Steel Development

U.S. Industrial Capital Trends

For all intents and purposes, transaction volumes fell off a cliff as of the first of April largely due to the spike in the 10YT rising from 163 at the turn of the calendar year, up to 251 on 01 April 2022; an increase of 54% in 90 days. The decrease in transaction volumes in 2022 were largely a result of two factors: i) rising debts costs and a corresponding shift in underlying values that created a bid/ask spread between buyers/sellers, and ii) the fear of “catching a falling knife,” meaning that values “tomorrow” were going to be lesser than values “today”. Throughout the southeast, we saw a handful of “unicorn trades” defined as posted sales that were well inside the general market’s opinion of cap rates. These “unicorn trades” were largely a result of either a) below market rents with near term roll or b) a basis that was far below current replacement costs.

“Prologis’ acquisition of Duke Realty gave industrial a boost in October. However, outside of this massive transaction, activity was sluggish. Individual asset sales were down 56% compared to last year, showing the impact of rising interest rates on investment sales. Transactional cap rates are on the rise, as is pricing, albeit at a slower clip. Over the past year, industrial leads all asset types in price appreciation” – Aaron

Jodka Director of Research, U.S. Capital Markets

Volume YOY Change

*Source: MSCI Capital Trends US Industrial October 2022

Looking ahead to 2023, Colliers recently completed its 2023 Global Investor Outlook Survey. Components of the survey are below. For those interested in reading the results of the entire survey, click here to download the full 2023 Global Investor Outlook Report.

How do you mange and deploy capital?*

*This chart represents how often each selection was chosen relative to total responses provided. For each selection, the % figure indicates the percentage of investors surveyed who chose this specific selection, whereby each investor could choose multiple answers.

Please rank the following factors in terms of their influence on your ability to pursue your investment strategy during 2023:

% of investors who chose how the cost and availability of debt will impact their real estate strategies in 2023

Which types of industrial & logistics assets do you intend to invest in during 2023?

Source: Colliers 2023 Global Investor Survey

Deliveries in 2022: 100,000 SF & Greater

Speculative Development Deliveries

Build-to-Suit Deliveries

5,634,382 Total SF of Spec Developments Completed

42.6% % of Spec Developments Leased within Delivery Year

3,397,712 Total SF of Delivered BTS Projects

Hot Topics

Escalations & Rental Rates

Industrial owners have continued to reap the benefits of Central Florida’s supply and demand imbalance this past year. Two of the most notable themes we have observed have been a consistent push from owners to raise annual escalations, as well as continued rental rate increases.

When reviewing 50,000 SF+ lease comps dating back to the start of 2020, we’ve noticed an interesting increase when comparing the data through the end of Q3 2022. For the year of 2020, average escalations were 2.73%, which is a sharp contrast compared to an average of 3.55% for all deals completed as of the end of Q3, 2022. With very few exceptions, most landlords in Central Florida are pushing for 3.5%-4.0%+ annual escalations across the board, and while not commonplace, there are also some landlords holding firm at 5%, or utilizing language which reflects the higher of a predefined escalation, or the Consumer Price Index.

Rental Rates

Especially over the past six months, many developers have dropped land sites due to rising construction costs and interest rates, so the pipeline for new development has begun to shallow compared to the previous 12-18 months. While there are still a handful of projects currently under construction, our market is continuing to see an incredible supply and demand imbalance as buildings that are “immediately available” for lease are few and far between. When evaluating lease comp data for Polk County, one of our super-regional or state-wide distribution submarkets within Central Florida, there has been very noticeable rental rate growth since Q1 2021. Understandably, some of this data can be slightly skewed due to the longer timeline of executing deals. There are two data points to emphasize regarding the upward trend we are experiencing:

Three of the primary reasons we attribute increases to escalations and rental rates include:

ƒ Imbalance of supply and demand

ƒ Speed to occupancy

ƒ New-to-market tenants and increased competition

ƒ Rising inflationary data and associated consumer spending

“Over-Equitized” Investments

With limited lenders active in the marketplace, scrutiny over in place LTV/LTC and ongoing debt service coverage ratios (DSCR) resulting in lower proceeds, and debt currently pricing more expensive on a relative basis compared to equity, acquirers of industrial real estate are being challenged with over-equitizing their investments resulting in proformas with lower equity multiples and cash-on-cash returns. The net result of the aforementioned process eliminates some buyers from the buyer pool (those who do not have the financial capacity to close all cash or at lower leverage points) and an expected increase in refinancing activity as equity and debt price more equivalently in the future.

Large M&A Activity

The Prologis acquisition of Duke Realty in 2022 shook the CRE community as two of the largest industrial landlords in the country became one. The question looms as we enter 2023 as to which company will acquire and which company will be acquired next. REIT stocks have been beaten up as Wall Street experienced contraction throughout the trailing twelve months with the Dow finishing the year down 8.8%, S&P down 19.4%, and Nasdaq down 33.1%. The result of Wall Street being beaten up is the comparison of stock price to Net Asset Values (NAV) which at the beginning of December, REIT stocks were trading at an 8.8% discount to NAV.

Redemptions

BREIT and SREIT made headlines at the end of 2022 as financial periodicals published the news that the two privately listed funds had reached redemption limits and gated closings on client outflows. There are certainly multiple other examples of private funds that experienced the same redemption requests as BREIT and SREIT and the question as we enter 2023 is how these funds will manage their liquidity while still operating efficiently in the marketplace.

Leasing Case Studies

Service Line

Tenant Representation

Client (Tenant)

FedEx Ground Address

6708 Harney Rd

Tampa, FL 33610

Submarket

East Tampa

Transaction Size

308,237 SF

Working hand-in-hand with FedEx Ground’s national representation, Fischer, Colliers represented FedEx Ground to expand their Tampa presence. Given the high-volume nature of FedEx’s vehicle needs (high volume and high parking), Colliers was tasked with finding an infill location (core Tampa) that could accommodate the high-parking needs in an expedited process; removing the ability for a build-to-suit location.

With the tenacious efforts from HighBrook, the landlord of 6708 Harney Rd, Colliers secured the parking needs for FedEx (via partially parking inside the building) and accommodated FedEx’s desired operational start date of Q3 2022. This 308,237 SF lease for FedEx provided a total transaction volume exceeding $10.5M and at the time of signing, was the largest new deal completed in the Tampa Bay core submarkets in 2022.

Due to East Tampa’s lack of supply and rising rental rates, Colliers successfully convinced Becknell Industrial to move forward with speculatively developing a 110,752 SF facility on their last 9.2 acre parcel in Madison Business Park – which was historically marketed only as a build-to-suit for a single occupier. Altering their marketing strategy, Colliers could now market a flexible rentable area; catering to a larger pool of smaller occupiers and a larger array of potential tenants.

With construction beginning in Q4 2021, Colliers successfully preleased 55,376 SF to Atosa Catering, as well as an additional 32,400 SF to Bekins Moving Solutions prior to the end of Q2 2022, leaving only 22,975 SF remaining available for lease with tremendous activity.

Service Line

Agency Representation

Client (Landlord)

Becknell Industrial Address

4405 Eagle Falls Place

Tampa, FL 33619

Submarket

East Tampa

Transaction Size

110,752 SF

Capital Markets Case Studies

Airport 85 Business Center

Market: Charlotte, NC

Size: 154,920 SF

Seller: Collett Industrial

Buyer: Ares

Gaffney Distribution Center

Market: Upstate SC

Size: 1,033,169 SF

Greenville

Seller: Confidential

Buyer: Confidential

Hillside 290

Market: Upstate SC

Size: 282,700 SF

Seller: SunCap

Buyer: Confidential

*Currently Under Contract

Lane Industrial Park

Market: Jacksonville, FL

Size: 320,000 SF

Seller: PanAm

Buyer: Blue Rock

The Big Events in 2022

One of the largest headlines in Florida this year was unfortunately the devastation caused by Hurricane Ian. Thankfully, the Tampa MSA was fairly unaffected, but we cannot say the same for our friends and colleagues in Southwest Florida. The Colliers family came together to support those affected by Hurricane Ian and began a GoFundMe campaign with an initial goal of $25,000. We were ecstatic to break this goal within 24 hours and successfully concluded our campaign raising over $113,000 for relief efforts. We are incredibly thankful for some of our clients who allowed Colliers to utilize their vacant facilities to store and pack supplies. Once these supplies were packaged, many local members of our offices caravaned to the greater Ft. Myers region and hand delivered additional supplies to those affected by Ian. We could not have done any of this without our friends, partners, and colleagues, and pray for a speedy recovery for the Ft. Myers area. Additional information surrounding Colliers’ relief efforts can be found here.

Prologis Acquires Duke Realty

Prologis caused shockwaves in the commercial real estate industry when it announced an all-stock acquisition of Duke Realty Corporation in October; valued at approximately $23 billion. From a national standpoint, this transaction included the transfer of ownership of 142M SF of fully operational buildings, 7M SF currently under development, as well as 17M SF of developable land. From a more localized point of view, this acquisition more than triples Prologis’ footprint in Central Florida.

±1.3M SF

Existing Prologis Portfolio

±2.6M SF Legacy Duke Portfolio ±4M SF New Prologis Portfolio* + =

*Portfolio consists of Tampa Bay and Polk County

With the acquisition of Duke Realty, Prologis is now one of the top four largest owners in Tampa Bay (inclusive of Polk County) whose portfolio can accommodate tenants ranging from ~5,000 SF to ~450,000 SF under a single roof.

Hurricane Ian

Treasury Report

We’ve seen unprecedented rate hikes by the Fed in 2022 with four consecutive rate hikes of 75 bps since May, and an additional 50 bps in December. The FED fund rate is at the highest level since the Great Financial Crisis and has increased at a pace unseen since the 1980’s. For the last two years, we’ve been at historic lows which has allowed for the economy to recover from the COVID pandemic. With rampant inflation, however, the FED is on a mission to cool off this hot economy. With SOFT moving in step with EFFR, we expect to model for higher rates moving into 2023. With rates being as high as they are, increases should start to slow; providing less volatility in the capital markets environment.

Expansion of the Southeast Capital Markets Team

We are excited to announce that we have reached an agreement to bring on two additional capital markets brokers to the Southeastern Industrial Capital Markets Team. A formal announcement will be made in Q1 2023 of whom the individuals are, their new roles and responsibilities, and the expertise that they bring with them.

*Source Federal Reserve Bank of New York

Golf

New Partnerships in 2022

Notable Accomplishments

Ryan & Robyn celebrated their four-year work anniversary with Colliers

Winner of CREW Tampa Bay’s “Industrial Lease of the Year” with two additional deals as finalists

Robyn and Oliver maintained CoStar Power Broker status for the entire calendar year

Successfully brought two Lakeland projects – 5275 Drane Field Road and Heritage Business Center - to 100% occupancy

Awarded business and launched marketing for new development projects in Pinellas, Pasco and Marion (Ocala) Counties

Retained leasing after two of our portfolios traded hands; Westbay and Metropointe in Pinellas and Center Point Business Park in East Tampa

Our Team has Grown!

This past year was a monumental year for our team in terms of growth – with both the business and overall size of our team. Beyond adding three additional dedicated support members to our practice, we were afforded the opportunity to host two very talented individuals for short-term internships throughout the year.

What’s Our...? NFL Team Go-To Cocktail

Favorite Comedy Movie

Old

Dallas

Old

New Additions in 2022

Talladega

Our 2022 Interns

Ryan Vaught

Robyn Hurrell Oliver Vaubois Debi Stolberg Executive Managing Director, Capital Markets Executive Managing Director, Leasing Senior Associate, Leasing Senior Client Services Specialist

Tampa Bay Buccaneers Tampa Bay Buccaneers

Cowboys Tampa Bay Buccaneers

Fashioned Margarita

Fashioned Coconut Mojito Mr. Deeds Wedding Crashers Old School The Proposal

Riley Vaught

Emory Lay Akshar Panchal Junior Analyst, Capital Markets Client Services Specialist Market Researcher, Leasing

Detroit Lions Tampa Bay Buccaneers New England Patriots

Old Fashioned Moscow Mule Diet Coke

Nights Billy Madison Rush Hour

Harrison Pithers John Bondanza Intern, Capital Markets Intern, Leasing

Tampa Bay Buccaneers New York Giants Gin & Tonic Jameson & Ginger Wedding Crashers Wedding Crashers

Get to Know Our New Additions!

Riley Vaught

Alma Matter: University of Michigan

Born and raised in Michigan, Riley is an avid traveler. He enjoys outdoor activities and watching college football on Saturdays. Riley’s favorite memory from college would be rushing the field after beating OSU during his senior year. The best trip he’s been on was a week long camping/ off-roading trip in Utah.

Emory Lay

Alma Matter: Florida Atlantic University

With prior experience at Marcus & Millichap in Orlando, Emory made the transition to our team in March of this year. Emory moved to the Tampa Bay area with her roommate Lea and now lives just outside of downtown St. Petersburg. Emory spends most of her time at the St. Pete pier with her dog, Primrose. She loves football, reading and stand-up comedy.

Akshar Panchal

Alma Matter: University of South Florida

Akshar is originally from the Lake Nona region of Orlando and found his way to the team as a student at the University of South Florida. He spends much of his free time going to concerts and live sports events in the Tampa Bay area. He‘s also an active member in his community and participates in a mentorship program for underprivileged middle/high school students in Orlando. As an avid-travel enthusiast, he has recently completed trips to Canada, India, and England with hopes to expand his travels into Eastern Asia in the forthcoming months.

Team Events

Another Year for the Books

Buccaneers Game with Taurus

Buccaneers Game Hosted by Link Industrial

Lightning Game with Columnar & JDA

Ladies Dinner in Atlanta, GA

Colliers National Conference Evening Reception

Waste Management Open with TPG & KBC

Oliver & Lydia’s Wedding

SE Ladies in Logistics Retreat at Rosemary Beach