By Jeff Bender, Cushman & Wakefield
Cincinnati and Northern Kentucky have the same logistical advantages they’ve always had, with their location within a day’s drive of two-thirds of the U.S. population, allowing reach and penetration to major metro areas. With those advantages, the region has enjoyed a robust industrial market, similar to most key markets in the country.
Lessons learned from the pandemic, the pending opening of a nearly 1 million-square-foot e-commerce national air hub and growth of the Cincinnati/Northern Kentucky Airport (CVG) will truly differentiate the market from an occupier’s perspective. What’s more, that increased demand and Cincinnati’s topographical constraints, creating new supply limitations, will continue to make it a darling of institutional investors.
Quick delivery model
Amazon’s presence and $1.5 billion investment near the airport and Cincinnati’s central location place it in a prime spot for fulfillment, a big demand driver over the next decade.
For example, let’s say you need to buy or repair a laptop, smart phone, tablet or any other electronic device. The order for a new computer could be fulfilled the next day most anywhere in the world even if the order is placed late in the evening. With a repair, you box it up, take it to the nearest delivery service in the morning and it’s at a repair facility near CVG the same day. If the laptop arrives early enough, it’s repaired that day, back on the plane at 2 a.m. and back in your hands 24 hours later.
Another Cincinnati differentiator and lessons learned from the pandemic will certainly benefit the industrial market going forward. Ohio and Kentucky’s strong manufacturing base and skilled labor pool provide economic stability to the region and the industrial real estate market. It’s especially beneficial for owner-occupiers who can leverage their real estate as a bulwark during downturns. What’s more, the area’s talented workforce has always been a demand driver, and we think that’s about to accelerate as businesses work to onshore and source closer to home.
Prior to the pandemic and going back decades, just-in-time delivery and increased efficiencies revolutionized industrial development and logistics. Those strategies aren’t going anywhere, but COVID revealed a few weaknesses.
Supply chain struggles have led to shortages of everything from building materials, apparel, chemicals and tech and automotive components to the now famous toilet paper shortage. Thousands of cars and trucks, nearly completed but lacking semiconductors or some other part, sit outside factories and in unused parking lots across the Midwest and Southeast.
So how will end-users react? Will they hedge and lease or acquire more logistics space to keep higher inventories? It’s likely, and many are expected to increase those inventories by as much as 10 percent. Where they might have had a 300,000-square-foot requirement three years ago, a new paradigm may lead to a 500,000-square-foot requirement, just to avoid the supply chain woes we’re currently experiencing.
Those same shortages and supply chain problems are making development more expensive, though. Whether that’s a short-term issue or longer-term headwind remains to be seen.
Yet we do know that year-over-year nonresidential construction input prices increased 23.9 percent in May, according to an Associated Builders and Contractors (ABC) analysis of U.S. Bureau of Labor Statistics data. The figure increased 4.8 percent from April to May. Even as supply chains work out the kinks, the ABC doesn’t expect construction or oil prices to decline substantially due to strong demand.
Mid-year direct vacancy landed at 4.7 percent, up 50 basis points over the first quarter but unchanged year-over-year. Net absorption for the quarter declined, too, but that metric for the first half landed at more than 3.1 million square feet.
Additionally, the second quarter marked the 40th consecutive quarter of positive, direct net absorption. While net absorption declined quarter-over-quarter, partially due to a handful of significant move-outs, first and second-quarter gross leasing activity was steady, with 2.96 million square feet in the first and 2.2 million square feet in the second quarter. Leasing activity is a metric that tracks all new leases and expansions signed in a given quarter, regardless of when the space is absorbed or occupied.
There are few signs of demand abating — it’s far more likely to continue expanding — and there’s more than sufficient new construction to meet that demand. More than 3.3 million square feet of new construction has been delivered in 2021 through mid-year, including a number of large, not-yet-leased modern bulk buildings. Nearly 4.5 million square feet of new development is in the pipeline.
Tenants aren’t the only ones generating high demand for Cincinnati industrial properties. Since the beginning of the pandemic, we’ve seen Hillwood Development sell a 1.1 million-square-foot bulk distribution facility to a third-party logistics provider for $75 per square foot, a solid number for this market.
Investor demand is disrupting the traditional merchant-developer model as well, as “forward” sales gain traction. Forward sales involve a developer selling a newly built, vacant property to another developer/investor. We’ve seen this new trend with Al. Neyer and Clarion in Hebron, Kentucky; WPT and Exeter in Walton, Kentucky; and Ambrose and Black Creek Group in Fairfield, Ohio.
Cincinnati’s industrial market has flourished for the past few years, comparable with its peer markets and the sector as a whole. The trends are expected to accelerate momentum and lead to further growth, which favors the region. While it’s always been a steady industrial market, Greater Cincinnati is well positioned to capture more than its share of deals and continue to draw interest from world-class investors.
Jeff Bender is vice chair with Cushman & Wakefield. This article originally appeared in the July 2021 issue of Heartland Real Estate Business magazine.