By Jeff Bender, Thomas McCormick and Seattle Stein, Cushman & Wakefield
We’ve been doing this for a while. Every cycle with gang-busters demand and absorption comes to an end, as does every downturn. So, with the Cincinnati industrial market, we find ourselves in the doldrums since mid-2023, and we may not fully turn the corner until next year.
Perspective and context matter, though. We’re coming off record absorption and demand at the end of 2020 and through 2022, when we also closed the year with an unsustainable 1.7 percent vacancy rate. Before the entire world paused for COVID in early and mid-2020, we had a record year in 2019 as well.
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While vacancy hovers around 6 percent at mid-year, that is basically the Cincinnati industrial market’s historical average. Four consecutive quarters of negative net absorption certainly defines “doldrums,” but that must be weighed against the previous 48 consecutive quarters of positive net absorption through mid-2023. We’ve also seen a slight increase in asking rental rates, up to $6.25 per square foot, despite negative absorption.
So, despite a lackluster past 12 months, we have positive momentum, and that’s bolstered by many of the factors that have always made Cincinnati one of the most solid industrial markets in the U.S.
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Bright spots
Rising interest rates, as well as investors’ need to digest a wave of acquisitions amid the pandemic, put industrial capital markets on life support for the past 18 months. That’s beginning to thaw.
Around mid-year, we’ve had three institutional transactions close, accounting for 1.5 million square feet of Class A industrial space with pricing as high as $100 per square foot. An additional institutional-level deal is under contract as we write this. What’s more, new capital markets transactions introduced new investors to the market in Dermody Properties and Transwestern.
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Private-capital demand, especially with freestanding owner-occupier opportunities, has always been a strong suit of our industrial market, and that’s certainly true today, perhaps now more than ever.
Manufacturing accounts for one-third of Cincinnati’s 330 million-square-foot industrial market, which is one differentiating factor versus our Midwest peers. Many manufacturers desire to own their real estate for a number of reasons, and that tends to bolster vacancy and the overall market.
Vacancy for this type of freestanding building is 3 to 4 percent, and investor demand has been strong preceding the pandemic. Pricing on these properties has increased by as much as 50 to 70 percent, but end-users can still buy at a significant discount versus new-construction pricing, which is now $110 to $200 per square foot. For these small business owners, owning the underlying real estate is a wealth and net-worth play as well, adding value for a potential exit or retirement.
On the other hand, record delivery of speculative industrial space in 2023 and a spate of move-outs and subleasing are the primary reasons vacancy jumped 4 percent. After 22 buildings totaling 9 million square feet delivered last year, we’ve had zero significant speculative construction starts this year. While historically we welcome speculative development, this pause gives the market an opportunity to absorb new space.
Additionally, two move-outs are another big piece of recent elevated vacancy. St. Bernard Soap Co. and Crane Logistics vacated more than 1.1 million square feet in total, but occupiers such as Allen Distribution and Mattre Corp. partially offset those losses. Gold Medal Products’ acquisition of nearly 200,000 square feet in Evendale, Ohio, ate away at vacancy as well.
Further, we project more than 32.5 million square feet of leasing opportunities in the market, though some are statewide or Midwest prospects, and nearly 500,000 square feet of pharma and medical-device tenants in Cincinnati’s near-term pipeline, expected to land in the next 12 months.
While the Cincinnati industrial market has seen a significant slowdown in the past 12 months, that experience parallels most every city in the Midwest, where we’ve fared better than many peer markets, and North America. We’re all working through decelerating leasing and absorption and higher interest rates that have impacted every sector, few more so than commercial real estate capital markets. We also have the usual pause in business activity that comes every four years with presidential elections.
Despite these short-term headwinds, Cincinnati remains one of the strongest markets in the country. Our manufacturers continue to add jobs and produce worldclass products for business-to-business customers and consumers, growing their industrial commercial real estate footprint all the while. For the first time in several years, tenants have plenty of quality options across the region. A break in speculative construction creates breathing room for stabilization as well.
As we mentioned at the beginning, we’ve been doing this for a while. We’d certainly prefer the perpetual deal-making machine of 2022, or 2019 or 1999 for that matter, but this is a business of cycles — and the current one, while not ideal, is far from the worst that we’ve seen. We’ll weather it together and be ready for the inevitable rebound in one of the best industrial markets in the U.S.
Jeff Bender is an executive vice chair, Thomas McCormick is a managing director and Seattle Stein is a director with Cushman & Wakefield. This article originally appeared in the July 2024 issue of Heartland Real Estate Business magazine.