Trends in Industrial Market and Taxes - Class 4

Industrial

The decrease in consumer spending in retail has led to retailers being cautious of their warehouse inventories leading to a slow recovery in the industrial market. Retailers have begun opting for just-in-time supply chains rather than warehousing product. Distribution centers and warehouse space has seen an uptick in leasing activity, however, these leases are more short term, 6 months or less, than long term leases; a sign that retailers may be gearing up for the holiday season. Warehouse owners are agreeing to these deals with hopes of turning the lease into a long term tenant. Analysts are still unsure if this year’s leases are a rebuilding of depleted inventory or business growth.

As a result of negative absorption and reduced demand for industrial space has led to a decrease in rental rates. NREI reports effective rent fell 6.5% in 2009 to $4.35 per square foot and decreased 3.7% to $4.19 in 2010.

Some industrial owners have become creative in leasing out their space. Owner’s of industrial buildings from the 1940’s and 1950’s who can no longer compete with the large distribution hubs are seeking out fringe tenants. These tenants are typically artists such as painters, photographers, and musicians who benefit from large studio space at a relatively cheap rate. This creates a win-win situation for both the owner and tenant. The owner has cash flow and a tenant who feels pride in the building while the tenant is able to operate their business at a fraction of the cost of newer office or industrial space.

Taxes

A result of property appraisals decreasing and an overall poor economy, cities have seen their tax base shrinking. To combat this drop in revenue, states are downsizing and slashing costs. A large part of this measure is a reduction in office space needs for governmental uses. Analysts at J.P. Morgan Chase have noted that REIT’s with large portion of governmental assets should be watched more closely as renewals are not guaranteed.

It’s been reported that state tax collection has decreased by 2% in the 2010 fiscal year. This amounts to a decrease of $14.3 billion which follows a decrease of $65.8 billion in 2008, according to NREI.

States have increased their search for additional taxes on real estate. One area that receives great tax treatment is property with agricultural status. The benefit in question is the ability of land with agricultural status to be tax at use value rather than market value. The difference, which can be fairly significant, can make a sizeable dent in the bottom line of investors. The target of state tax assessors will impact developers who hold land for future development who use the agricultural status to lessen the burden of holding for an extended period of time.