169
The figures for past and projected new industrial building completions are anemic in Northeast Ohio, leaving a lot of commercial real estate brokers concerned that there will not be enough buildings to meet a steady increase in buyer and tenant demand. From 2008 to 2012, a paltry 1.4 million square feet of new industrial buildings were added to the Cleveland landscape, the majority of which were designed specifically for owner occupants or were fully pre-leased.
Projected new construction, as reported by real estate research firm Reis, does suggest an increase in future building velocity. However, absorption is forecast to outpace new buildings through 2017 by a factor of 4 to 1. If this were to occur, Cleveland would see a drop in vacancy rates to historically low levels, approaching five to six percent. That may not seem alarming to some observers, but when you back out functionally obsolete inventory in some of the older pockets of industry, the true vacancy rate will hover at or below four percent.
“There is simply not enough product to show prospective buyers and tenants,” says Robert Wetzel of CRESCO Real Estate. “We hope this spurs some speculative construction. Depending on a prospect’s needs, we simply don’t have many alternatives.”
New Construction Ahead
The Cleveland/Akron area is ranked among the top 10 largest industrial markets in the country with more than 478 million square feet, according to CoStar Group. Yet the amount of past and projected construction in greater Cleveland compared to its Midwest neighbors is low. From 2008-2012, Cleveland ranked last in actual building completions compared to five of its closest Midwest neighbors. Through 2017, Cleveland is expected to remain last in projected new industrial building completions compared to those same cities.
Given these basic market fundamentals — coupled with the dynamics of being a top 10 market — expect new construction to accelerate sooner rather than later. Existing inventory has diminished to the point where new construction has to become a consideration. Prices for existing, more desirable owner-occupied assets have stabilized and have improved to a level well above those reported in 2009. In many cases, we are seeing multiple offers on buildings. And buildings that traded for $25 per square foot in 2009 are now trading at more historic levels of $35 to $45 per square foot.
The recovery has not been uniform among all segments of the Cleveland industrial market, as evidenced by the disparity in absorption and vacancy figures. According to CoStar Group, the flex market, comprising 24.7 million square feet, maintains a 13 percent overall vacancy rate. The warehouse/manufacturing sector, which includes 453.5 million square feet, shows an 8.5 percent vacancy rate.
All About Location
Statistics for flex industrial properties vary widely by location. A look at two of Cleveland’s larger suburbs with considerable flex inventory shows the stark difference that occurs between two similar cities. Brecksville, a popular business location located roughly halfway between Akron and Cleveland, shows a current flex vacancy of 10.2 percent, while Twinsburg, a nearby competitor with similar characteristics, shows a vacancy rate of 5.1 percent. The same discrepancies exist in the warehouse/manufacturing building category. The suburb of Solon boasts a 5 percent vacancy rate, while Euclid is languishing at a 10.3 vacancy rate for larger buildings.
You have to be careful what you build and where you build it in Cleveland. Our submarkets are complex, and you need to do your homework before building. The flex market has been on its back for years now, and we don’t see a recovery sufficient enough to warrant new construction in that product category anytime soon.
“The owner-occupied, single-tenant building is expected to be the driver in our market for years to come,” says Wetzel. “Developers are having trouble justifying the economics of a 100 percent speculative building, but we anticipate some situations where we will see new buildings coming back that are either 50 percent pre-leased or 100 percent owner-occupied because of a lack of viable inventory. This product type is where we are experiencing availability issues, and our local businesses need a place to grow.”
For companies considering the idea of building new product, available land is not the issue in Northeast Ohio. A quick study of the market reveals an abundance of suitable parcels that were prepared for industrial development just as the nation went into the last recession. Cities and towns were all getting in on the development boom, and many approved development plans that included generous community reinvestment area packages to help set them apart from their competition. Many of those parcels remain vacant today. Their shovel-ready condition coupled with aggressive municipal incentive packages will benefit both tenants and occupants for years to come.
Time will tell what direction the Cleveland market will take in the next five to 10 years, but with vacancy declining and absorption increasing, new buildings are expected to come on line soon, adding to a market of more than 478 million square feet.
— Matthew Beesley, principal with CRESCO Real Estate