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Emerging Trends in the Industrial Real Estate Market: Q&A with DCT Industrial Trust

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By Jack Stubbs

DCT Industrial Trust, a Denver, Colorado-based company, is a preeminent presence in the industrial real estate market nationwide. DCT is a publicly-traded, real estate investment trust (REIT) that specializes in the ownership, development, acquisition, leasing and management of bulk-distribution and light-industrial properties. The company’s business platform serves companies on both a national and local level and across various industries such as medical, consumer products, online retail, logistics, manufacturing and government.

On Thursday, November 2nd, the company released its Q3 2017 report announcing financial results for the quarter ending September 30th, which highlighted the company’s current standing. “We delivered another strong quarter of growth in both our financial and operating results,” said Phil Hawkins, President and CEO of DCT Industrial, in the statement. “Market fundamentals, driven by high occupancy and upward pressure on rents, have never been better. Our development program also continues to outperform as we leased 943,000 square feet of space since June 30th and acquired several highly-desirable infill land sites for future development. Reflecting the strong growth in our earnings, we are pleased to announce a 16.1 percent increase in our quarterly dividend.”

DCT has a significant presence in the Puget Sound region as well, with the company recently acquiring several assets throughout the Kent Valley submarket. The Q3 report highlighted four active projects that DCT has recently undertaken. DCT commenced construction on Blair Logistics Center Building A, a 543,000 square foot building in the Fife/Tacoma submarket of Seattle. This acquisition was the result of a 50-acre land purchase in 2016. Shell construction is scheduled to be complete in Q3 2018. In August 2016, the company acquired 14.6 acres in the North Kent Valley submarket of Seattle to develop DCT Hudson Distribution Center, a 288,000 square foot building. The building is currently under construction, with shell construction is scheduled to be complete in Q3 2018.

In September 2016, the company acquired 36.6 acres in the Sumner submarket of Seattle to develop DCT 167 Landing, a 365,000 square foot project. 167 Landing is a two-building project: one building will total roughly 250,000 square feet and the other will comprise roughly 100,000 square feet. According to Patrick Gemma, senior vice president and market leader with DCT in Seattle, 167 Landing will continue to be a work in progress over the coming months. “[This] project is going to take a lot of fill material. We’re going to fill it all winter, and we’ll start construction in spring 2018,” Gemma said. Finally, the company’s fourth undertaking is the acquisition of 9.6 acres in Renton to develop DCT Monster Distribution Center, a 161,000 square foot building. As part of the acquisition, the company purchased an older 140,000 square foot building on the site, which they plan to demolish as part of the proposed redevelopment. “It will be a complete redevelopment. It’s a last-minute last-mile play. It’s very close to downtown Seattle,” Gemma said.

Patrick Gemma, Senior Vice President for DCT Industrial Trust

As senior vice president for DCT, Gemma is responsible for overseeing development and capital deployment activities in the Seattle market and has over 20 years of real estate experience, including most recently as Senior Development Manager with Panattoni Development. In light of the recent Q3 2017 report, we spoke with Gemma about some of the notable findings from the report, some of the company’s current projects in the Puget Sound region, as well as identify some of the larger trends currently driving Seattle’s industrial market.

How would you characterize the strength of Seattle’s industrial market? It seems like the North Kent Valley submarket is as active as ever. What factors/trends account for the continued activity in this area?

Currently, the Kent Valley, essentially from Seattle to Tacoma, is the healthiest I’ve seen the industrial market in my career. I’d say we’re at all-time lows, or at least approaching them, in vacancy rates. This is definitely the best rent growth that we’ve ever seen. As an example, CBRE had a report that they put out a few weeks ago that looked at industrial rent growth worldwide. Seattle was number one in the globe, with 17 percent rent growth year-over-year.

I started at DCT five years ago, and before that I worked for Panattoni Development. This is the best I’ve seen it [the industrial market] in 17 years. In the five years I’ve been with DCT, we’ve been one of the most aggressive industrial developers in that time frame. To date, we’ve done nine buildings totaling 1.8 million square feet. Those buildings are 100 percent leased right now. We’re just continuing the trend we’ve been on this entire cycle. We’re very bullish on the Puget Sound region and Kent Valley and continue to be one of the most active industrial developers [in the region].

Can you tell me a little about the projects in the Puget Sound Region that DCT is involved with? What are some of the specific features and qualities of the assets that DCT aims to acquire? How do the four current undertakings fit into DCT’s overall acquisition strategy?

The four properties that we recently acquired are all extremely strategic locations. There’s one in Tacoma, one in Sumner, one in Auburn and one in Renton—the properties range from the north end of the Kent Valley to the port of Tacoma.

Across the country, but especially here [in the Puget Sound region], we look for tough sites that other [developers] have either passed on or potentially dropped, sites that have entitlement issues, potential environmental issues. All four of these projects fit that mould, where we spend the time and money needed to create value.

For example, in both Auburn and Sumner, both sites have wetland issues and took us two years to get through entitlements before we purchased the land and started construction. So we ended up getting the land at advantageous prices to create value along the way. From our perspective, that’s what we try and do [with all of our projects]. We would much rather do the tougher projects that create value than pay the highest price just to get money out the door.

Which individual companies does DCT predominantly serve?

We don’t have a typical tenant. We have leased to Fortune 100 companies, and we’ve also leased to very strong retail and local companies. We’re always looking at a tenant’s business and credit to ensure that it has the ability to pay rent through the term of the lease. We’ve got a mix of tenants throughout our portfolio.

What are some of the factors that contribute to DCT’s expanding portfolio of industrial developments? What makes DCT Industrial stand out from other REITs in its overall approach?

One of the things that sets us apart is that we’ve got boots on the ground. We’ve got a local office, and that alone sets us apart. Only some of our competitors have local developers. As a result, we’ve got extremely strong relationships with the brokerage community [here]. Each one of the four projects is listed with a different broker or pair of brokers. Also, these are not just sites that other developers have looked at and passed on; several of them are off-market deals that never hit the market, so we get to look at those when other [developers] haven’t.

A lot of it is convincing sellers that we’re the right people for the job because of our track record. We were able to solve problems and close when other [developers] haven’t been able to. Right now, we’ve developed 1.8 million square feet. And with other projects that we have—either under construction or planned on properties that we’ve purchased— it’s a similar amount of development [expected] over the next couple years.

Given that DCT tends to focus on industrial properties that present practical or logistical challenges, how does DCT stay ahead of the curve? How does DCT keep up with the influx of large-scale developments coming in the industrial market throughout the region? Given the results found in the Q3 2017 Earnings report, what do you expect for Q4 and for 2018 looking ahead?

To date, the heavy lifting on all four of these is for the most part done, in terms of the entitlement process. We’ve now got these projects to the point where they are either under construction or being designed. The challenge now is to get these buildings built and leased as quickly as possible. The Urban Land Institute just named Seattle as the top market in the country [in the Emerging Trends in Real Estate 2018 report, a publication from PwC and ULI]. I think the industrial market was the fourth best in the country. Depending on who you’re talking to, it could be the first. So we look forward to leasing these buildings.

They are what we consider the best-in-class locations and buildings. Our track record shows [that] of the nine buildings that we’ve developed, they’re all 100 percent leased right now. We have 50,000 square feet vacant in a 4.2 million square foot portfolio. With the kind of rent growth that we’ve seen, right now this market is as hot as I’ve seen it. So we’re extremely bullish on all these projects.