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For the first half of 2013, the Cincinnati industrial market has reflected the growing strength of the broader economy, while gaining momentum alongside the manufacturing sector.
The increased activity seen thus far has left fewer options for tenants in the market and increased leverage for landlords in negotiations for relocations, expansions and renewals.
As supply tightens, new speculative construction will likely fall short of the demands of the marketplace. This trend will likely continue into 2014.
Tenant Activity Accelerates
While there has certainly been an uptick in the volume of prospects touring properties, these businesses are more committed to a course of action than we have seen in the last few years.
Further, these companies are increasingly optimistic and giving consideration to larger spaces to accommodate future growth and longer lease terms in order to lock in today’s aggressive lease rates.
Similarly, tenants in older properties are seizing this opportunity to move into more modern spaces, causing a shift in the quality of vacant inventory.
A cautious mood remains, as lease negotiations continue to involve discussions of termination options and other risk-mitigation language.
The northern Cincinnati suburbs have been active in the first half of the year, with more than 70 new industrial leases totaling 2.5 million square feet. To the south, Northern Kentucky’s industrial markets saw 37 leases signed for almost 1 million square feet.
Major lease signings in the first half of 2013 include Netrada’s sublease of 400,000 square feet in West Chester, Blue Buffalo Co.’s lease of 390,000 square feet in IDI’s new Monroe Logistics Center B, as well as Ball Metal Beverage Container’s lease of 162,000 square feet in the same building.
Current prospect activity levels indicate strong demand will continue in the third and fourth quarters. Strong interest is evident across the market for spaces of all sizes. That’s particularly true in the manufacturing, e-commerce and food industries.
Consistent Property Sales
Investors continue to pursue quality properties that offer the ability to deliver solid returns. First Highland purchased the 1.1 million square foot Avon facility. With a purchase price under $6 per square foot, this property has tremendous promise if it can lease the vacant 750,000 square feet.
More conservative investment sales have continued at a steady pace as a variety of REITs and owners and developers realign their portfolios.
Opportunistic occupiers have also been active in purchasing properties, while prices remain at a fraction of the cost of new construction.
In the largest of these transactions, Huhtamaki, the specialty food packaging manufacturer, purchased a 940,000-square-foot section of the former Ford Transmission plant from Industrial Realty Group for slightly more than $8 per square foot.
Similarly, Polaris purchased two buildings totaling about 450,000 square feet in Wilmington for under $15 per square foot.
Speculative Construction
With the recent delivery and full leasing of the 553,694-square-foot Monroe Logistics Center B, IDI has found reason to be bullish on the Cincinnati market. It has broken ground on two new projects: another 650,000-square-foot building in Monroe and 631,000 square feet in Walton, Kentucky.
Several other developers are considering moving forward with speculative construction of big boxes, especially in Northern Kentucky, where the vacancy rate has drop to 4 percent.
Landlords Gain Advantage
While the overall vacancy rate remains around 8.5 percent for the market as a whole, options are becoming limited for tenants looking for specialized features and for availabilities in a growing number of submarkets and size ranges. This trend is providing landlords with increased leverage in negotiations.
Tenants are seeing less free rent, fewer large tenant improvement allowances and less incentive packages and are now more likely to see their final lease rates near the advertised face rates. As supply continues to tighten, we expect Cincinnati’s advertised lease rates will rise in the second half of the year and into 2014.
The shift in positioning is also likely to create more difficult negotiations for tenants who want to renew.
These tenants will begin to take a harder look at the options in the market in order to avoid the increases in rent that landlords will seek.
— David Lotterer, senior associate, Jones Lang LaSalle