Navigating the Emerging Industrial Lease Market: What You Should Know

While the national real estate landscape is evolving and somewhat unsettled for commercial office space, industrial real estate is in high demand. This reflects a shift in the need for logistics and manufacturing as well as employers seeking alternate and hybrid office settings.  Traditional office and industrial leasing share many of the same key terms, including pricing, common area expenses, and operational costs. However, there are additional and unique considerations for industrial landlords and tenants.

One key consideration is the appropriateness of the facility for the tenant’s use. Industrial tenants often have substantially different use needs from other industrial tenants, based upon the tenant’s industry and operations. This includes the possibility of vastly different needs in terms of transportation and loading facilities, HVAC and ventilation, floor loads, the use of data centers, and power needs.

Tenants also need to ensure that the zoning is appropriate for their needs (light vs. heavy industrial) and that there is flexibility in the lease and the facility for the tenant’s possible evolving needs over the term of the lease.

Both landlords and tenants should also consider the burden and expense of removing industrial fixtures like mezzanines, cabling, and cranes and the lease should clearly allocate these responsibilities and costs between the parties. This may require discussions about specific financial considerations to ensure the availability of funds to de-mobilize a site at lease end, including guaranties and letters of credit.

Industrial landlords should have a clear understanding of the tenant’s operations and their planned use of the premises. This may lead to specific restrictions upon the tenant and will assure the landlord that its property is not being used contrary to any government restrictions.  When a facility has multiple industrial tenants, it is important for the landlord to further ensure that one tenant’s industrial operations will not unreasonably interfere with other tenants’ operations in terms of noise, temperature, vibration, or exhaust.

The presence, use, and disposal of hazardous materials should also be addressed in advance of the lease. Tenants should consider the possibility of environmental concerns left over from a previous occupant. Landlords need to understand their tenants’ use of hazardous materials and if they have any history of environmental complaints or non-compliance at prior business locations. Both parties should evaluate representations and warranties addressing these issues, in addition to terms related to cleanup, indemnity, and, in appropriate cases, an environmental assessment at the end of the lease term.

Industrial leases require consideration of a number of factors that do not apply to most other business leases and might be easily overlooked, especially by tenants whose businesses are expanding into industrial space for the first time. Efforts by both parties at lease inception will promote clarity with respect to everyone’s expectations and requirements and will promote a smooth leasing relationship.

Posted by Attorney Jeffrey R. Schmitt. Schmitt represents businesses and individuals in commercial litigation matters including banking and finance, real estate, condo and homeowners associations, professional liability defense, title disputes, transportation, and pension and retirement plans. 

Published in the April 2023 St. Louis Small Business Monthly.

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