2024 CFIS Re-cap

Colliers Central Florida Industrial Summit 2024 Re-Cap On April 24th and 25th, 2024, our Colliers Central Florida offices, along with representatives from Jacksonville, South Florida, and Southwest Florida, celebrated hosting our 4th annual Central Florida Industrial Summit (CFIS). This two-day annual event is intended to bring together our region’s most active real estate professionals for a little fun on the course, a banquet dinner overlooking both the downtown Tampa skyline and Tampa Bay, then concluding with a four-hour forum on Day 2. During the forum, we had five panels consisting of 30 panelists who contributed their time and shared their expertise and perspective on the dynamic industrial real estate market we are all facing today. The following summary highlights keep components of the thirty-six hour even. We look forward to seeing you at next year’s conference on April 23 and 24, 2025

Market

Inventory (SF)

Southeast Region

3,805,418,841

State of Florida

1,046,491,914

Central Florida

493,961,934

Setting the stage for the forum, Blanton Hamilton – analyst for the Colliers Southeast Industrial Capital Markets – gave a state of the market and shared a few statistics on how Central Florida compares to both the state of Florida and the greater Southeast Region. Following this, the audience was engaged with a brief set of polling questions. Those results, from participation of over 75 non-Colliers attendees, are shown here.

Which of the below markets would you consider your company’s top three focuses?

Central Florida Atlanta South Florida Savannah Charlotte Jacksonville Nashville Charleston Raleigh Norfolk Greenville/ Spartanburg 0%

10%

20%

30%

40%

50%

60%

70%

80%

90

2024 Forum Polling Questions What role(s) do you currently fulfill within your firm?

Select all that apply

As it relates to the greater Central FL market, how would you categorize your company’s position?

Both Own & Actively Developing

Acquisitions/ Dispositions

Own Existing Assets Asset Management

Actively Developing Hunting/No Current Position

Debt/Equity Procurement

Holding Land 0%

20%

40%

60%

80%

100%

0%

Which size classification most suits your company’s investment strategy?

10%

20%

30%

40%

50%

Of the FL markets, which do you believe will experience the strongest rent growth in 2024?

South Florida

100,000 300,000 SF

Jacksonville

Over 300,000 SF

Central Florida Under 100,000 SF

South West Florida 0%

10%

20%

30%

40%

50%

60%

70%

80%

0%

5%

10%

15%

20%

25%

30%

35%

Throughout your portfolio, irrespective of geography, what size range are you seeing the most activity right now?

Where do you believe spot cap rates are today for stabilized class A across the Southeast?

Under 25,000 SF

5.5 - 6.0%

40%

45%

25,000 75,000 SF 4.5 - 5.0% 75,000 150,000 SF Over 6.0%

Over 500,000 SF 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

50%

Panel 1 Leasing & Development | The I-75 Markets The forum opened with a panel focused on the “I-75 Markets” which sought to cover over 200 miles northsouth from Ocala down to Fort Myers. There was a collective opinion that velocity in leasing has slowed over the last year, with the majority of the activity we are seeing is the 25,000 – 50,000 SF and 100,000 – 150,000 SF range. That said, an optimistic opinion was shared amongst all panelists that the slowed momentum is not reflective of a reduced need for space, but more so an impact from occupiers continuing to delay decision making.

In the immediate post-COVID era – between 2020 to 2022 - the demand for industrial space created somewhat of a frenzy that led users to often make panic decisions for fear that their first-choice warehouse

“I think the dam will break before the end of the year.”

location would be leased. In attempts to make a strategic real estate decision, the occupiers are now doing their research on market rents, optimizing cubic volume required, and conducting in-depth labor analyses. However, the general occupier is still not well versed in some of the challenges developers are facing today, such as long-lead times to provide power and associated switch gear.

Later in the panel, a healthy conversation was underway on the industry of the most active occupiers. By total volume of deals, the building supply and construction related occupiers have routinely ranked as the most active. Drawing from the interest on his Central Florida holdings and active developments, Cantey Heath of Johnson Development Associates, highlighted the top industries that are common themes across his reporting:

Manufacturing

General Retail & Wholesale

Food & Beverage

Automotive

From left

Cantey Heath JDA, Inc. | Mike Swink Nuveen | Dan Dilella Equus Capital Partners | Brendon Dedekind Trammell Crow Company | Steve Kros Transwestern Development Company

RAPID FIRE QUESTION If picking one, do you believe the demand on the I-75 corridor will grow North or South?

• South because more available labor • North due to residential growth in Pasco County • North to avoid growing traffic congestion on I-4 • North because infrastructure is keeping pace

RAPID FIRE QUESTION What do you consider market standard for base building power?

• 1M SF

- 4,000 Amps

• 300K SF - 1,800 - 2,000 Amps • 100K SF - 1,000 Amps • 20K SF

- 200 Amps

Panel 2 Leasing & Development | The I-4 Markets Switching gears to a panel focused on the “I-4 Markets” – serving to highlight the more established geographies such as Tampa, Lakeland, and Orlando. The three markets are now often grouped into one larger geographic focus for investors; possibly expanding even further as we continue to see homogenous trends across

“Florida is evolving as a single market where bulk industrial users are - initially in their search agnostic to a specific market.”

Florida.

Is there a concern however that larger blocks of space are being leased, only to hit the market shortly thereafter for sublease? John Kruszewski of Prologis talks about subleasing activity across his markets in both Orlando and Tampa highlighting that Prologis has +15M SF in Orlando and approximately 50,000 – 60,000 SF went up for sublease in 2023 (of those, some turned out to be direct deals). On a much smaller portfolio of +3.5M SF in Tampa, less than 1% is on the market for sublease today. Overall, the topic of subleasing has had a relatively minimal impact on Central Florida. If anything, a user wishing to vacate their space early may have even presented the Owner with an opportunity to capture rent lift much sooner than expected (via a termination/direct lease).

With an exceptionally active audience participating in the interactive portal for live (and anonymous) questions, we had some interesting questions with some equally interesting answers.

Q: How has the average T.I. package evolved in the last decade?

A: Spike in requests for air-conditioned facilities and complex dock packages Q: Are you willing to amortize beneficial building improvements beyond the lease term?

A: Yes, if it’s an improvement reusable for the next Tenant Q: Across all Central Florida, where do you believe annual growth will be at the end on 2024?

A: Across all panelists, answers came in between 3 - 4% Q: Will you consider a fixed rent renewal option?

A: Unanimously no, no exceptions Q: Do you think the smaller Tenants can stomach the increasing rent pressure?

A: Sometimes you just have to let them go; it’s just a function of each respective party’s business Q: What development yield makes sense?

A: Somewhere in the low to mid 7’s to get capitalized today Q: When faced with both a slow-moving credit deal, or an inferior credit immediate need – which path are you pursuing?

A: Unanimously, panelists will take the bird in the hand – provided backstops are in place

From left

Benjamin Hoog CBRE Investment Management | Jake Kurth Scannell Properties | Tyler Jones Robinson Weeks Partners | John Kruszewski Prologis | Bob Krueger Brennan Investment Group | Matt Ruthven The Ruthvens

RAPID FIRE QUESTION If TI exceeds the TIA, at what interest rate are you amortizing the overage into the base rent?

• 12% • 11 • 8 - 10%

RAPID FIRE QUESTION If you own a 1st generation vacancy, would you consider a lease for less than 3 years?

• Yes, assuming I can charge a premium • Yes, provided the TI is minimal and the Tenant is sticky • Generally, no, unless the Tenant is a customer elsewhere in the portfolio • No, minimum three-year lease • Depends, evaluate the length of time the building has sat ready for occupancy & vacant • Depends, if there is a larger building strategy at play

Panel 3 Funding the Capital Stack After a short break the next panel took the stage focusing on “Funding the Capital Stack”. One of the first topics discussed was how capital goes about calculating development yields. There are many different ways to go about doing this. Some groups look to use their perm debt and add a 15-20% margin on top of that.

Other groups will look at where core cap rates are for the specific market the project is in and add a 125150bps spread above that. The real question is “Where are

“I am a mile wide and an inch deep, you are a mile deep and an inch wide. Have the ability to tell a good story about your project and educate me on why you made the decision to develop there.”

core cap rates today?”. Most groups on the panel said they need to see 3-5 deals with similar profiles (i.e. Vintage, WALT, location, credit) post within a short period of time of each other. What that means in reality for core cap rates, we will leave for you to decide.

The real challenge for spec development coming back is its competition with other investment vehicles. With the risk-free rate being elevated compared to the 10-year average and a multitude of deals on the market below replacement cost. Spec development is facing some competition. With construction and debt costs skyrocketing, it is getting harder for spec development to pencil. When looking at stabilized deals below replacement costs, capital sees opportunity to get a higher risk adjusted return by deploying money in these types of deals. Another headwind for spec development is capital looking to deploy more money is credit facilities in 2024. With the returns being in the mid-teens and with a lower risk profile, credit facilities are attractive to capital and some of their foreign LPs. One big takeaway for developers is that capital wants to be sold on the story and have good reasons to fund the project. When analyzing a new project, groups focus closely on competing projects, lease up timelines and quarter over quarter Tenants in the Market lists. These all have more weight than the headline market statistics. The ability to educate the capital on why there is demand and why the sub-market the project is in has a competitive advantage, the more likely the project will be funded.

Q: What are must haves for Sponsors?

A: Good reputation, transparency, communication, market knowledge, and the ability to sell the story story on the onproject the project Q: What are some previous JV structures?

A: There are a wide range of possible structures, as high as 99%/1% and as low as 65%/35% Q: What is a down the fairway deal?

A: BTS with a credit tenant, BTS spread is 100bps inside of spec development requirements Q: What are the complete ‘no’s’ for spec development?

A: Having to take on entitlement risk for a site after closing on the land

From left

Robert Wasenius CenterSquare Investment | Matthew Beam Washington Capital | Trey Korhn Valley National Bank | Lex Rickenbaker Affinius Capital | Austin Iglehart MetLife Investment | Joe Paskov BentallGreenOak

RAPID FIRE QUESTION When does spec development come back & what is the catalyst for that to happen?

• Continued strong absorption numbers • Decrease in construction costs • Cost of capital coming down • Required yields coming in • Healthy spreads being underwritten to avoid worse case scenarios

RAPID FIRE QUESTION Are development yields for shallow bay inside or outside of yields needed for bulk?

• Same Yields • Low 7’s for both projects • Strong support for shallow bay being inside of bulk product • Lower than bulk product but not by much

Panel 4 Southeast Capital Markets The final panel of the day is the “Southeast Capital Markets” panel. This panel focused on the type of deals they are pursuing and how they are looking at rent growth in Central Florida and other underwriting assumptions they are making. Given the tough capital markets environment, long WALT deals seem to be a thing of the past and everyone wants a short WALT story with a mark-to-market opportunity. With vacancy rising throughout the Southeast, the mark-to-market opportunities need to come between years 2 and 4 for buyers to feel comfortable. This allows for the current vacancies to get absorbed and then for the realization of the continued rent growth that we are seeing throughout the Southeast.

Another big topic of discussion was

“We look to be a net acquirer in 2024. The reason being, of buildings greater than 150,000 SF only 21% is institutionally owned. When looking at buildings smaller than 150,000 SF it is just 3%. We see a lot of room to grow.”

amortized TI and how that impacts buyers’ appetite for a deal. There were a few different viewpoints on how amortizing TI effects the valuation of a property. The first viewpoint was that there is a massive discount to the value of a property if the

amortized TI is not separated from base rent. The inability to show a mark-to-market story later in the hold period, really limits the ability to push on pricing. On the other side of the coin, buyers look at combining base rent and amortized TI as a way to help combat negative leverage early on in the hold period. The higher yield helps balance out the negative effects of the high interest rate environment and allows buyers to get skinny on acquisition caps.

Sticking with focusing on tenants, there was a discussion on whether or not opex pass throughs matter to buyers. Some groups said they pay attention to the total burden put on tenants and others said that it isn’t top of mind for them. That did open up the discussion for what is causing opex to rise so quickly and it was mostly correlated to the sharp increase in insurance costs. This is especially an issue in coastal markets in the state of Florida. For one off properties, buyers are typically seeing between $2

RAPID FIRE QUESTION What do you model for rent growth in Central Florida?

• In East Tampa 4 - 5%, Orlando 4% and in Lakeland it is stagnant • 3% • 0%

and $3 a SF. Some groups can chew that down buy pooling assets from across their holdings and placing insurance on a portfolio level. The highest quote of the conference was $3.75 a SF for a metal building in Pinellas. Certain groups had a more bullish outlook on the insurance market than others. Bulls say that most of the losses from the increase in bond rates are behind us and that the re-insurance market is getting more allocations that should provide some relief in the market here shortly.

From left

Greg Johnson STAG Industrial | Jeff Grabowski EQT Exeter | Kyle Grant Venture One RE | Michael Gamzon INDUS Realty Trust | Rick Murphy BlueRock | David O’Reilly High Street Logistics

RAPID FIRE QUESTION Will you do negative leverage and what do you focus on to calculate your point of neatural leverage?

• No, won’t do it. We focus on using debt constant when calculating for neutral leverage • No, we focus on debt constant as well • We’ll do it • We’ll do it for up to 18-months • Will do it, but purchase mostly all cash so doesn’t affect our firm too often

RAPID FIRE QUESTION What do you model for reversion caps?

• We model reversion caps to be 25-50 bps above spot caps • Yield on cost is our main focus when underwriting • Baseline is South Florida and we add a 25-50 bps spread over that for Central Florida • Focus on unlevered returns

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