Harlan Reichle, Reichle | Klein Group
The lion’s share of the absorbed space can be attributed to the delivery of the 1.6 million-square-foot Home Depot warehouse in Troy Township. Even if the Home Depot deal is excluded from the data, the total absorption notched in the third and fourth quarters was impressive.
Absorption would have been higher had the nearly 400,000-square-foot former Ace Hardware distribution center in Perrysburg Township not become vacant. In 2014, Ace announced that it would relocate its warehouse in the Columbus, Ohio area.
Dearth of Suitable Space
Despite the generally strong performance of the industrial real estate sector this past year, one senses that many of the players in the market are feeling some level of frustration. The frustration stems from the sentiment that things could be better — a result of the generally tight supply of buildings and the even tighter supply of the right types of buildings.
The activity level of users searching for sites continues at a steady and normal pace in Northwest Ohio and Southeast Michigan. However, space users are frequently struggling to find suitable facilities in the market.
Meanwhile, brokers find themselves with interested buyers and tenants, but in many instances the available buildings don’t fit their requirements. Consequently, transaction activity involving existing buildings is down. At the same time, owners with vacant spaces are left wondering why they cannot fill their spaces or sell their buildings if the market is so strong.
Winners and losers
The Toledo area’s inventory of industrial space, while relatively large at approximately 86 million square feet, is primarily comprised of older buildings originally built for heavier manufacturing purposes and that have a high level of physical obsolescence. In some instances, developers have successfully undertaken adaptive reuse projects and subdivided the space for contemporary users.
However, users are demonstrating a far greater sensitivity to location as logistics considerations and transportation costs become bigger drivers in the site-selection process. Properties with ready access to the interstate system are more desirable, whereas buildings that require extensive use of surface streets are struggling.
Building age, condition and features such as ceiling height, column spacing, openness, flexibility and the number of truck docks are all significant to companies in the market today. The limitations of many of the properties in the market cause costly compromises on the part of users.
In many cases, the buildings are simply not large enough to accommodate the operations of users in the market today, many of whom are looking for spaces of 250,000 square feet to 1 million square feet or more. There are only a handful of buildings in the Toledo region of this size.
Perhaps the best illustration of this dynamic is the disparity in vacancies between Class A space and everything else. While the overall industrial vacancy rate stood at 7.7 percent at the end of 2014, vacancy among Class A buildings was 3.3 percent.
Cranes a Common Sight
Commercial contractors might be the one group taking some satisfaction from the state of the market. Construction activity has dramatically increased since the recession, and more industrial users are finding it necessary to consider facility expansions or new buildings built to suit their needs.
In June 2014, the Toledo-Lucas County Port Authority and local developers broke ground on a 100,000-square foot speculative building at Overland Industrial Park, formerly known as the Toledo Jeep Assembly Plant Site. It was the first spec industrial building to be constructed in many years.
Assuming that demand continues to hold up, we anticipate more new construction. Not surprisingly, we have also noted an uptick in the sale of industrial sites along with interest in industrially zoned land, suggesting that we are not alone in expecting the development of more new buildings.
Rental rates have only recently begun to rebound after sliding downward since the recession. We expect the current market conditions will contribute to more upward pressure on asking and effective rental rates.
This upward pressure on rents would be a positive event for the market. Not only do higher rental rates aid owners of existing buildings, but they also make construction of speculative buildings more economically viable.
Findlay on a Roll
The region is also attracting more warehouse distribution operations beyond the Home Depot facility. The Findlay, Ohio submarket continues its history of success in this segment. The McLane Co. Inc., a wholesale grocery products distributor, last May announced plans to build a $119 million, 337,000-square-foot distribution facility in Findlay, creating an estimated 425 full-time jobs. That project is expected be complete in March 2016.
— By Harlan Reichle, CCIM, SIOR president, CEO, Reichle | Klein Group. This article originally appeared in the March 2015 issue of Heartland Real Estate Business magazine.