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The Columbus industrial real estate market has continued down a path of decreased vacancy and increased build-to-suit activity. Many developers and tenants are trying to determine if this space tightening is going to continue or diminish in the coming months.
Industrial real estate experts who had their pulse on the market accurately predicted a year ago that absorption would be taking place at a healthy clip at the end of 2012 heading into 2013.
This change in the market has resulted in limited options for tenants seeking space above 100,000 square feet. Meanwhile, developers are considering the possibility of building warehouses on a speculative basis and tenants are seeing a change in economics and concessions from previous years.
Pendulum Swings
The current 7.6 percent industrial vacancy rate in the Columbus market is at an all-time low. You have to go back to the late 1990s and early 2000s to find a period when the vacancy rate was nearly as low as it is today. The recent lack of space availability is starting to impact tenant choices.
A tenant that used to have six or seven options for a 400,000-square-foot warehouse space is now finding that it only has two to three viable options. Additionally, landlords who used to offer steep concessions to attract or secure a deal are now dialing back their concessions and seeing an increase in rental rates overall.
One point to keep in mind with the Columbus market, however, is that while the demand drivers for space continue to stay strong, the conventional wisdom among owners is that it’s still important to try and secure a deal as quickly as possible.
Even though the market is more favorable to owners than it has been at any time since the Great Recession, owners do not yet have the luxury of having multiple deals compete for the same space, or the ability to pass on a deal they would normally accept in anticipation of a better deal next week.
Build-to-suit Surge
The changes in the market have led, as expected, to an increase in build-to-suit activity. This past summer, Ace Hardware announced plans for a 530,000-square-foot build-to-suit and Avnet Inc. announced plans for an approximate 600,000-square-foot build-to-suit.
The Columbus market does still have two to three existing options of approximately 500,000 square feet available for large users.
The decrease in inventory of available product has led many industrial space users to consider the possibility that they may need to build a building to accommodate their needs. This has led many users to begin their real estate decision-making earlier than they normally would to accommodate possible construction.
Despite the scarcity of available space, it remains difficult for outside developers to come into the market now and secure land holdings in the path of demand. Many of the viable industrial sites are currently under developer control, and they are generally not in sell mode unless the price is right.
In addition, several developers such as The Opus Group and Prologis have pad-ready sites of 500,000 square feet, which give them a leg up on other competition.
What’s Next?
The main question posed by tenants and developers alike these days is this: “Are the demand and market conditions here to stay for the foreseeable future?”
The answer to this question is generally “yes.” While the vacancy rate won’t continue the quarter-over-quarter decline that it has for quite some time, the current market conditions appear to be holding strong.
There will likely be another speculative building or two announced in the coming six to nine months, but it is highly unlikely that Columbus will have four to five speculative projects announced.
Tenants will continue to find that there are fewer options compared to the last time they reviewed the market, but they will also find that the rents are not skyrocketing and that landlords are still willing to strike a deal to retain or secure their business. Overall, it is a delicate balance in the market right now, one that should be stabilizing within the next few quarters.
Columbus continues to see an increase in the number of e-commerce, distribution and manufacturing projects in the pipeline. A number of those projects require a significant amount of headcount and investment in building systems and equipment.
National Recognition
According to a Gallup daily tracking poll conducted throughout all of last year, the Columbus market’s Job Creation Index score of +30 was second only to Houston’s score of +33 among the 50 largest U.S. metropolitan areas in 2012.
The Gallup score was based on 43 percent of Columbus-area workers who indicated that their employer was hiring workers and expanding the size of its workforce, compared with only 13 percent who indicated their employer was letting workers go and reducing the size of its workforce. (About 1,200 workers in the region were surveyed. The score of 30 was obtained by subtracting the staff-reduction figure from the expecting-to-hire figure.)
In August, Honda announced plans to spend $215 million to expand its operations in Ohio to the tune of $215 million, including $35 million for a new building on its Marysville campus. According to The Columbus Dispatch, Honda currently has 13,700 employees in the state.
Meanwhile, other companies are also choosing to strategically locate in Ohio because of its favorable business climate.
— Dan Wendorf, senior vice president, Jones Lang LaSalle Americas Inc.