It’s hard to believe we are already halfway through 2022 but adapting to the challenges posed by the post-pandemic world surely causes time to fly! At Mohr Capital, we started off the year in a big way, by expanding our investment strategy with the acquisition of the 350-room DoubleTree by Hilton Austin, our first entry into the hospitality sector.
We’ve had an interest in this vertical for quite a while and feel this is the perfect time to execute that strategy. Hospitality provides an excellent hedge against rising inflation, thanks to the ability to increase rents daily and grow revenue on par with expenses. We will still need to diligently manage operating expenses as inflation will also put upward pressure on many product and service costs. We are in a challenging labor market for hospitality, but this is a highly successful hotel, so we are optimistic we can achieve substantial returns.
In addition to this new vertical, we continue to ramp up our industrial development. We have 7 million square feet of industrial construction underway and plan to build more than $1.1 billion worth of speculative industrial properties across the country. Our goal is to have all of our current industrial development out of the ground in the next two years.
We have a deep understanding of the industrial market and NAIOP, the Commercial Real Estate Development Association (the leading organization for developers and owners) recently recognized our development work with the publication of an article by our Chief Development Officer Gary Horn.
NAIOP (with more than 20,000 members) advocates for responsible commercial real estate development and effective public policy. They outlined how Mohr Capital worked with the town of Whiteland, Indiana, by partnering with clients and city leaders to find innovative ways to overcome challenges and create an outcome that benefitted everyone. Our client, Cooper Tire and Rubber Co., needed a larger facility but wanted to stay in the area and keep its employee base. That’s where our team used outside-the-box strategies to find a great location that exceeded their needs while also creating an employment hub that will boost the local economy. We made a positive contribution to the community while building out our top-notch Mohr Logistics Park, the largest industrial park built in Indianapolis over the last 10 years, which will contain more than 6.7 million square feet at build-out.
The Impact on Tenants
With the macro conditions we’re seeing in the market now, I anticipate property operating expenses will continue to go up, especially on industrial properties. Tenant rent escalations in some of the top industrial markets have already reached 4% annually and in New Jersey they are talking about increasing another half-point to 4.5%. For tenants seeing their annual bumps go from 3% to 4%, that extra 1% annually on a 300,000-square-foot building at $5 NNN over 10-years adds another $813,000 of rental expense. Now imagine that on a portfolio of 15 buildings! Obviously, it compounds quickly. In advising users, we remind them to keep a close eye on real estate-related operating expenses and pass-throughs.
The industrial market got so competitive at one point that tenants and prospective buyers were approaching us to purchase our buildings before construction was even completed and before we had a tenant. We sold one property before the roof went on. Transactions like these, known as “forwards,” won’t be seen again for a while. However, it is more important than ever for tenants to evaluate their total industrial network or U.S. footprint as industrial vacancy rates remain at all-time low levels. This can make expansion or future property acquisitions more difficult.
In California, New York and New Jersey, industrial rents are running up to $14 NNN and higher. It wasn’t long ago that rents in these same markets were averaging $8 per square foot.
Industrial and multifamily have obviously been the hottest real estate sectors so far in 2022. As we look at where to invest, Mohr Capital is focusing a good deal of energy out west because of the high barriers to entry.
Our firm has gone through substantial growth and Mohr Capital’s latest move into the hospitality industry is very exciting for us. We anticipate more hospitality opportunities in high-growth markets like our acquisition in Austin while exploring the possibility of bifurcating some of these assets.
Rising prices and mounting interest rates may dominate the headlines, but investment opportunities are still out there. In today’s environment, you just have to work harder to find them.
Founder & Chairman