Subleasing, third-parties changing industrial market

When Celestica vacates its building in the LaVergne-based Mid South Logistics Center later this year, the company will drop 160,000 square feet of industrial sublease space on Nashville's market.

Despite this, the industrial market has not yet felt the negative impact of surplus sublease space, now estimated at 1.6 million square feet in the Nashville MSA (counting 40,000-square-foot spaces and above). But that could soon change, experts say.

Randy Wolcott, president of Industrial Real Estate Services, says the demand is certainly softer than it has been.

"For buildings over 100,000 square feet, I have 50 opportunities for people right now," says Wolcott, and smaller space is likewise available.

Due to increased subleasing, industrial tenants now have a wider variety of space from which to choose, something that historically has not been the case. For tenants, that means a buyer's market.

"More sublease space creates opportunities for potential tenants to get less expensive space," says Wolcott.

But Wolcott adds that for owners, subleasing presents a new challenge, as does another major development in the industrial market.

In the other major change, short-term industrial lease deals are becoming more common these days as building owners attempt to accommodate the lease needs of tenants.

Wolcott attributes some of this phenomena to the short-term nature of companies these days, meaning that more and more companies don't look very far into the future to recoup a financial reward or to determine the viability of an enterprise.

Another factor contributing to shorter leases is the overwhelming interest in available industrial space from third-party logistics companies (3PLs). Local industry experts say the interest of logistics companies in Nashville and the surrounding area is dominating the market.

"When you start looking at larger deals, 200,000 square feet and larger, 70 percent are 3PL deals. Three years ago this was not the case," says Wolcott.

Ben Goodwin agrees. The industrial leasing specialist with Collier, Turley, Martin, Tucker says that several large logistics companies are currently requesting RFP's (request for proposals) for area industrial properties, indicating a growing interest in the larger market.

The challenge in working with third-party logistics companies from a leasing perspective is that the industrial building owner may not know until the last-minute in lease negotiations who the logistics company is representing. In addition, the logistic company will only want a lease based on the term on their own contract with their client company, be it one, two or three years.

So not only will industrial building owners not know who they are dealing with, but often must negotiate a short-term lease deal. In return, however, building owners will usually require the right to remove the tenant with only a short period of notification.

"No one really wants to give a one-year lease," says Wolcott, "but companies looking to lease space can actually get one now."

Some companies will even agree to a month-to-month lease, however, in these situations the building owner usually requires the right to remove the short-term tenant with only 40 days notice. Companies are willing to tolerate this level of insecurity for the flexibility a very short-term lease provides.

At the same time, five- and 10-year leases are still available in the marketplace but aren't as prevalent as they used to be, he says.

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