After posting slightly positive net absorption for three consecutive quarters, the industrial market in Cincinnati bucked that trend in the second quarter by recording negative absorption of 836,000 square feet, according to Xceligent.
This setback can partially be attributed to a falloff in demand, but was largely the result of several large owner-occupants moving out of their buildings. As a result, the overall vacancy rate climbed 20 basis points in the second quarter to 10.2 percent. Still, that’s below the peak vacancy rate of 10.7 percent reached in the second quarter of 2011.
Significant new vacancies in the second quarter included Avon (750,000 square feet), Hamilton Fixture (330,000 square feet), and Sonoco Corrflex (319,000 square feet).
This wiped out the positive absorption recorded in the first quarter. Through the first half of 2012, the market has posted 395,000 square feet of negative net absorption.
Underlying Trends
Similar to what we experienced in 2011, tenants are taking advantage of discounted rental rates in Class A product. There has been marginal activity involving Class B or C product.
The good news is that there are growth opportunities with some space requirements of more than 100,000 square feet. That demand is driven by occupiers from out of town that are coming to the market, versus local tenants utilizing adjacent landlords for leverage in the lease renewal process. Typically this type of tenant will focus on large, Class A distribution buildings.
There is a flurry of companies in the market looking to purchase buildings in order to take advantage of low prices and historically low interest rates. During the past year, there have been several property sales to space users who were able to move out of an older, less efficient building into a newer building.
The supply of large, quality buildings for sale has thinned out. Consequently, sales activity in this segment of the industrial market has been brisk when the larger properties do come to market. Expect an increase in build-to-suit projects with modest increases in sale prices.
Similar to 2011, demand for industrial space remains slow, but steady. On the supply side, the market is getting tight in certain product types and submarkets.
Rental rates have changed little since the beginning of the year, but we may see some rental rate increases by the end of the year.
Asking rates for large blocks of Class A industrial space currently range from $2.95 to $3.35 per square foot, triple net.
Landlords have been willing to provide generous concessions off these asking prices up to this point, but as the market for these buildings tightens the strike prices will be closer to the asking prices.
Options for Class A bulk warehouse product that can deliver more than 300,000 square feet are beginning to dwindle. If you move up to Class A bulk with more than 500,000 square feet, your choices remain fairly limited, even if you expand your search into the Ohio/Kentucky/Indiana markets.
The Bluegrass State Shines
Northern Kentucky has outpaced the Ohio side with overall market activity and absorption. Hebron, Kentucky offers the majority of the bulk product in Northern Kentucky and only has one remaining option that can deliver more than 350,000 square feet. The vacancy in Hebron’s bulk sector dropped from 11.3 percent at the end of 2011 to 8.9 percent currently.
Hebron has traditionally been a strong performer with convenient proximity to the Cincinnati/Northern Kentucky International Airport and has been on the logistic dot map with larger occupiers such as UPS, Amazon.com and The Gap.
With limited land sites remaining in Hebron, we suspect Richwood will be the new horizon for bulk warehouse space in Northern Kentucky. In fact, we believe we will see speculative construction in Richwood within the next 12 months.
Speaking of speculative construction, IDI is finalizing the first spec building in our market since 2008 with the completion of a 553,000-square-foot building in the Monroe Logistics Park. The Monroe Logistics Park and Corridor 75 each have a 100 percent, 15-year real estate tax abatement.
As we enter the second half of the year, the Cincinnati industrial market appears poised to continue with slow, but steady growth. However, the uncertainty in the economy and election year could slow our recovery.
— Josh Young is vice president of Cincinnati Commercial Realtors, a member of the Cushman & Wakefield Alliance.