Baton Rouge Industrial Market Insights
The industrial sector continues to be a bright spot in the Baton Rouge commercial real estate landscape, despite concerns around rising interest rates, surging inflation, and economic uncertainty. Key fundamentals are strong, including low vacancy rates, rising market rent rates, and decreasing cap rates.
Today’s sky-rocketing e-commerce sales, coupled with recent supply chain issues, have significantly increased the demand for warehouse and distribution facilities across the country. However, like most markets, the Baton Rouge area does not have an abundance of industrial space available for sale or lease. Scarcity is driving demand for these properties up, as well as transactional sale prices. Inventory is increasing, but not fast enough to meet demand. Here’s a more in-depth look at what’s happening in the Baton Rouge Industrial Market.
INDUSTRIAL MARKET DEMAND
Vacancy Rates:
- Vacancy rates for industrial space in the Baton Rouge market are typically lower than the national average and have consistently decreased since early last year.
- This low vacancy rate can be attributed to supply not keeping pace with demand. Historically, we haven’t had much speculative development in our market—any new construction is usually build-to-suit.
- In that trend, specific-use industrial properties are currently being built by national developers, and I believe this could cause an increase in vacancy over time. For instance, distribution space, which has not historically been a high-profile property type in our industrial market, has gained in popularity across the country, and we’re starting to see more distribution space come online here.
INDUSTRIAL MARKET SUPPLY
Inventory:
- The total square footage of inventory for industrial space in Baton Rouge is slowly increasing, though we are building more space relative to inventory than nationally.
- However, most of the new inventory coming online is earmarked—we do not see any speculative space for startups or new companies entering our market. So, inventory is increasing, but not fast enough to meet the demand.
Market Rent:
- Market rents per square foot for industrial space in Baton Rouge are steadily increasing, and our rental rates are rising faster than nationally. According to a recent report by the National Association of REALTORS (NAR), in the first quarter of 2022, market rent growth increased 11.7% from the previous year.
- The most significant factor driving up rental rates is the surge in construction costs. The cost of construction is, on average, 30% higher than it has been over the last couple of years, and I don’t see any sign of that coming down anytime soon.
- Moving forward, I think we will see a continued trend of rental rates increasing for a short period until the supply chain issues get resolved. Then we’ll see some stabilization.
INDUSTRIAL MARKET SALES TRANSACTIONS
Prices:
- Transaction sale prices per square foot for industrial space in Baton Rouge have been increasing over the past year and rising faster than the national average.
- One reason we’re seeing this record pricing—and it depends if we’re talking about vacant owner-occupied versus investment industrial properties—is the national demand for investment properties as a hedge against inflation. The other reason is simply a lack of supply.
- Also, money was cheap up until recently, so tenants became buyers. They were willing to pay more because of a lack of supply and took whatever space they could get. So, I think that’s a significant factor in why we see price increases.
- Looking ahead, I think we’ll see some stabilization in pricing. I don’t think it will continue to increase as we’ve seen. Interest rates have much to do with that, and banks’ willingness to lend money pushed prices up over the past year.
Cap Rates:
- According to NAR data, cap rates for industrial space in Baton Rouge have been inching up over the past year, and our cap rates are consistently higher than nationally.
- If you look at the data, rates have reportedly increased from 8.3% to 8.5% over the past year, so it’s a modest increase. However, in my opinion, this data does not reflect what’s really playing out in our market. If anything, we’ve seen a reduction in cap rates, not an increase.
- If you are accounting for every transaction and including every industrial property type, perhaps it might reflect an increase, but for the most part, the cap rates I’ve seen have been in the low eights or high sevens. For higher-quality industrial properties, I’ve seen cap rates from 6% to as low as 5.75%. It could simply be when this snapshot was taken that higher quality properties were not selling, or maybe the older and functionally obsolete properties that sold during this time are pulling the average market cap rate up.
- I think a bit of the exuberance of out-of-state investors will subside, and rising interest rates will affect that. But there’s still a lot of money out there, a lot of transactions going on, and a lot of people that wanted to defer doing exchanges. So, the days of the nine and ten percent cap rates are long gone.
For more information on the Baton Rouge industrial market or commercial real estate in the area, feel free to reach out to one of our experienced advisors or me.
Download the entire Baton Rouge Industrial Market Report
(Sources of data used: CoStar®, US Census Bureau, US Bureau of Labor Statistics, and US Bureau of Economic Analysis.)
Steve Legendre, CCIM
Regional Vice President
(225) 329-0295 / slegendre@stirlingprop.com
Learn more about Steve Legendre, CCIM
President’s Message: The Butterfly Effect
Sometimes amidst all the noise, turmoil, and vitriol that seemingly bombard us endlessly, it can be difficult to pause and remember what’s truly important in life. And sometimes, that reminder can come in very unexpected ways.
Recently, I have been reminded of how our individual actions, albeit small at the time, can have a ripple effect on others without us even knowing it sometimes.
Thinking about this phenomenon reminded me of a lesson my mom used to teach us called “the butterfly effect.” So it goes, “an act as small as the flutter of a butterfly’s wing can create a tsunami on the other side of the world.” (My mom always said she would come back as a butterfly—how fitting.)
The butterfly effect has become a common metaphor for how small, seemingly insignificant moments can alter history and shape destinies and how some ostensibly inconsequential acts or gestures can profoundly impact others and, therefore yourself.
Recently, this lesson was reaffirmed once again in the most unexpected way.
Inspired by my children, I penned a letter on social media questioning if one person’s voice could make a difference. The overwhelming response triggered a very unexpected series of events, new acquaintances, and unique experiences I would never have imagined. Two years later, that tsunami of events is still moving and growing and has ignited in me a passion for continuing to foster it.
This journey has led me to cross paths with and meet some incredible folks doing remarkable work. I have also had the opportunity to meet and mentor some extraordinary young people. Together, we have worked to help bridge differences and open up candid conversations among a diverse group of people, a focus that has become critical in today’s environment and extremely rewarding.
I am astonished as I sit back and think about how that one superficially small action has sparked so much positive momentum. I see the impact it has had on others and felt its effect on me.
So, if you, like me, ever sit back and wonder if you can make a difference in someone’s life, your community, industry, or workplace, you absolutely can. Every one of us has the power to impact our surroundings. Just start with one small thing, one action, or a nice gesture.
As my mom would say, go out and flap your wings! Because as the butterfly effect goes, you just may cause a tsunami of kindness, generosity, or joy in someone else’s life. You never know where that tsunami may lead.
Commercial Real Estate Outlook: Optimism Amidst Uncertainty
ICSC Las Vegas returned this spring—with a new format and brand—after a three-year hiatus due to the COVID-19 pandemic. Attendees and exhibitors rebounded, with higher than anticipated crowds; reported attendance was over 22,000.
Optimism was abuzz, and the pure excitement of being back to in-person events. However, uncertainty still lingered on the minds of many due to ongoing pandemic effects and economic and social unrest. We caught up with a few Stirling Properties team members who made the show to get insight into what’s happening in the retail industry.
Sky-rocketing construction costs vs. rents: One of the most significant issues we’re facing is the cost of deals for the landlord vs. what retailers are willing to pay for the space. “Retailers are expanding, but high labor and material costs remain challenging. Retailers are unwilling to pay more rent than they have historically; however, their box costs 50%+ more to build,” said Darryl Bonner, Senior Advisor. Right now, in many cases, rents don’t justify the cost of construction to make deals work. The imbalance is causing frustration on both sides and a pause in dealmaking. Still, many industry professionals believe this will work itself out with further correction of supply chain issues and compromises in building requirements/needs from retailers.
Inflation: The increased cost of goods and services undoubtedly affects how and what consumers buy. But so far, overall retail sales have not slowed much, coming off record sales numbers in 2021. As the pandemic began to wane and government subsidies trickled in, we saw a massive sales spike—what some call ‘revenge spending.’ But will this continue long term, with gas and grocery prices steadily ticking up?
People are still spending; they’re just spending differently. According to Rhonda Sharkawy, Senior Retail Leasing & Development Advisor, “There was so much movement around the pandemic; I think we are still seeing the settling effect. I believe sales reports will soften within the next year, and we will see where and how consumers are spending,” said Sharkawy.
Most retail brands remain optimistic. Even though their profits are eroded because of increased costs, they remain bullish on top-line revenue growth. Many believe this is a short-term economic issue that should not incite knee-jerk reactions. Chris Abadie, VP and Manager of Commercial Brokerage, noted, “Despite concerns about inflation and rising interest rates, risk tolerance seems higher than before.”
Retail shifts: Consumer demands have evolved over the last couple of years. But one thing holds—consumers want it all, and they want it now. As a result, convenience, speed, and multiple buy-and-collect options are paramount to the success of today’s retailers.
“The overall sentiment is that retailers are confident; they are stronger than ever, and they are investing in brick-and-mortar stores. Although consumers want options, they still want a physical store where they can see and touch the product and enjoy social interaction. Online sales are surging, but for many retailers, ecommerce is serving as another touch point or means for increasing store sales,” said Sharkawy. Moving forward, retailers will continue to invest in the shopping experience. We expect more experimentation with store layouts, formats, and product inventory.
The function of the retail center itself is also shifting. Bonner noted, “Most retail deals are now a mix of uses, with retail usually the second or third tier. Multifamily has become the new retail anchor, with medical not far behind.” In addition, we’re seeing more nontraditional tenants and service concepts filling shopping centers.
Technology: “Technology is finally having its moment in our industry,” said Abadie. For years, retailers have been pumping money into technology, targeting their customers and their specific wants and needs. Now, the commercial real estate industry can too.
From a retail/asset management perspective, technology integration helps with staffing, inventory, purchasing, and fulfillment. It is also emerging in building systems, using big data to help with environmental, social, and governance (ESG) efforts, and lowering the carbon footprint of commercial real estate.
Promising tech companies such as Placer.ai, Crexi, and Buildout are becoming industry standards. As CRE practitioners, new technology is helping us analyze the health of retailers and shopping centers. It’s also assisting us to better understand a store’s value through foot traffic vs. online sales vs. physical sales and how people are utilizing the store. However, the real game-changer is emerging tech that can use data and algorithms to identify new locations and market gaps and even project retail sales for future retailers. Emerging technologies will continue to develop and have drastic impacts on our industry moving forward.
Numerous headwinds affect consumer sentiment and spending, but it’s still a glass-half-full outlook. Those retailers that were successful and survived COVID are bullish on the future. The overall attitude coming out of ICSC Las Vegas this year was our industry has faced insurmountable challenges, and we are now better prepared to handle more adversity—so, how do we move forward? We’re all looking forward to continued momentum and more face-to-face interactions.
President’s Message: A Healthy Prognosis for Healthcare Real Estate
The healthcare industry has rapidly evolved over the last few years. Having broad access to quality healthcare, both physical and digital (e.g., telehealth), has become critically important, and healthcare providers are creating innovative ways to deliver their products and services to their clients in the most efficient way possible.
Healthcare service providers are making deliberate decisions on how and where to establish physical locations to meet customer demands, with access, convenience, and wellbeing top among those factors. We’re seeing more and more healthcare services shifting away from traditional hospital campus settings and emerging in local neighborhoods. Healthcare providers are taking a cue from the retail playbook by establishing multiple, well-situated locations within a community, increasing the number of entry portals within their respective networks while also exploring different facility configurations to enhance the customer experience.
We can expect to see more digital integration into the healthcare landscape like telehealth options and patient monitoring technology, self-check-in kiosks in waiting rooms (or no waiting rooms altogether), and even drive-thru options. Of course, all these new and emerging concepts will require strategic real estate planning and partnerships.
At Stirling Properties, we are adapting to the changing healthcare environment. While the demand for healthcare services continues to grow and transform, so are our service lines to meet those respective needs. As part of our company’s strategic growth plan, we have expanded into new real estate sectors with a translatable skill set which has added value and diversified our commercial portfolio. Here are a few of our recent projects:
- Development: A 20,000-square-foot freestanding Emergency Room & Imaging Services clinic in LaPlace, LA, based on a 20-year lease to Ochsner Clinic Foundation;
(4) Ochsner Kidney Care clinics in the GNO area, averaging 7,000 square feet, through a joint venture of Ochsner Health and National Renal Care (NRC); the conversion of a former retail building into a 25,000-square-foot multispecialty clinic in Bossier City, LA, in partnership with Ochsner-LSU Health System of North Louisiana (OLHSNL); Tammany Cancer Center in Covington, LA, a 75,000-square-foot, state-of-the-art facility in partnership with Ochsner and St. Tammany Health System; and Ochsner Medical Complex – The Grove in Baton Rouge, LA, a 210,000-square-foot medical center, including a five-story, 180,000-square-foot medical office building, and a 30,000-square-foot ambulatory care center. - Acquisition & Financing: We partnered with Ochsner Health System to refinance a $59.8 million newly built 129,875-square-foot rehabilitation hospital in Jefferson, LA; and we acquired and managed the renovation of the shuttered 205,000-square-foot Louisiana Heart Hospital in Lacombe, LA, into a Post-Acute Care Hospital with Ochsner Health System and its local partners, St. Tammany Parish Hospital and Slidell Memorial Hospital.
- Facilities Management: Stirling Properties manages Mary’s Medical Center in Shreveport, LA, a 730,000-square-foot, multi-story medical complex. Over the past three years, this virtually vacant campus has been repurposed to include neurosurgery, neurology, a pediatric specialty clinic, an OBGYN clinic, and training rooms.
- Leasing/Redevelopment: We work with several prominent healthcare providers to locate and re-lease dormant retail spaces with distinctive healthcare services. Current projects include a regional health and wellness club in Harahan, LA; a pediatrics clinic at River Chase in Covington, LA; a behavioral & women’s health clinic at Oakridge Place in Metairie, LA; a Restore Hyper Wellness clinic at Premier Centre, in Mandeville, LA; and regional tenant rep for JenCare Senior Medical Center; among many others.
Our team has learned to adapt to the diverse needs of our healthcare clients, which include Ochsner Health System, LSU Health, St. Tammany Parish Hospital, Our Lady of the Lake, Baton Rouge General, and many more. We have tailored our real estate services so that whether our role is advisory, development & redevelopment, site selection, master planning, brokerage & lease negotiation, entitlements, financing, design & construction management, or asset & property management, our healthcare real estate team can assist.
The healthcare industry will continue to expand and evolve in the future, but it goes much further than simply keeping our communities healthy; it’s serving as an economic driver. Healthcare has become the reason why people and companies choose to locate/relocate in a particular area or region. Much like parents look to live in areas with good school systems, access to quality healthcare is equally important. Healthcare is also a significant job creator—one of the largest employers in the U.S.—and not just for medical providers, doctors, and nurses. Healthcare employs IT professionals, technicians, construction jobs, and maintenance providers—everything from landscaping to HVAC techs to cleaning services. The greatest need for the healthcare industry is a trained workforce and labor market.
The prognosis for the healthcare industry unquestionably looks healthy moving forward, both from a real estate and economic development perspective. Businesses and communities that can adapt to take advantage of the resulting opportunities will reap the benefits.
President’s Message: Together, we prospered
We’ve undoubtedly experienced challenging times over the past two years, but through it all, we not only persevered but rather we got stronger and better as a company and as a team. As a result, I’m proud to report that Stirling Properties emerged from 2021 with a record year!
Our success did not happen by accident, but rather because of the groundwork we’ve laid over the years—hard work, the solidarity and strength of our team, and our culture.
Take a look at some of our impressive results over the last couple of years. These were all accomplished with the collective effort of our entire team.
All-new Community Honda coming to Lafayette, Louisiana
Stirling Properties brokered sale of 10-acres for new facility.
Community Honda recently announced plans for an all-new state-of-the-art facility in Lafayette, Louisiana.
The 10-acre future home of Community Honda is located along Highway 90 near the airport. It will include a 50,000-square-foot facility with over 30 service bays, a children’s play area, a café, and many more amenities.
“After three years in Lafayette, we are excited to expand our presence to better serve the community,” said Roger Elswick, Community Honda owner.
Seth Citron, Stirling Properties senior advisor, brokered the transaction and worked with Community Honda to secure the new location. “This was a great project to work on, and I’m excited for Roger and Kim Elswick’s entire Community team. This will be a remarkable new development that will service their loyal employees and customers for the next generation of Honda products in and around the Acadiana area. I’m eager to see this property returned to commerce and provide an enhanced economic boost for the market,” said Citron.
With construction set to begin in 2022, the new facility is expected to open in 2023 and will be the first in Louisiana to use Honda’s newest designs.
For leasing information in southwest Louisiana, contact Seth Citron at scitron@stirlingprop.com / 337-572-0273.
