Before the Great Recession of 2008 and 2009, many developers believed they could continue to build commercial product and demand would follow. But as the economy came to a screeching halt, reality kicked in and many owners and developers were stuck with product that couldn’t be sold or leased.
Fast forward to 2014, and that stagnant product has slowly been absorbed as the economy has gradually recovered. From 2008 to 2014, construction of commercial real estate fizzled, resulting in lower vacancy rates and increased net absorption. Now, construction activity is beginning to increase and speculative construction is back in action.
This uptick in construction and speculative development is especially apparent in the industrial real estate market. In Ohio, the industrial vacancy rate sits at an average of 6.8 percent for 962 million square feet of industrial space that Colliers|Ohio tracks in Cincinnati, Cleveland, Columbus and Dayton.
Colliers|Ohio recorded more than 10 million square feet of positive absorption in 2013, and 6.9 million square feet during the first half of this year.
Colliers has tracked an uptick in absorption in the industrial market for several years, and the supply of quality Class A bulk product has diminished significantly. Developers have taken note, and plans for speculative product are now in motion.
Notable Projects
In greater Cincinnati, IDI has two speculative projects under construction: one in Walton, Ky.; and one in Monroe, Ohio. These two projects, which total more than 1.2 million square feet, are scheduled for completion by the end of this summer.
EBay Inc. plans to lease the facility in Walton (630,000 square feet), leaving only the Monroe location available. This new lease will create more than 300 new full-time jobs for greater Cincinnati. Meanwhile, VanTrust Real Estate delivered a 273,000-square-foot speculative facility in Hebron, Ky., in July.
In Columbus, several new speculative construction projects and build-to-suit projects are underway. In central Ohio, developers broke ground on 603,752 square feet of new construction in the first quarter and nearly 939,252 square feet of new deliveries.
MSC Hardware completed a 461,199-square-foot build-to-suit in the Southwest Columbus industrial market, Exxcel Project Management completed a 478,053-square-foot speculative distribution warehouse at Rickenbacker in CenterPoint Business Park, and Prologis broke ground on a 410,152-square-foot speculative distribution center at Prologis Park 70 in Etna.
Also, Duke Realty broke ground in the second quarter on a 743,000-square-foot build-to-suit distribution center for Bon-Ton in West Jefferson. Currently, the Columbus market has more than 2.8 million square feet of warehouse distribution space under construction, and another 2.8 million square feet slated to break ground in the third quarter. Of that total, up to 2.1 million square feet could be speculative construction.
Pace of New Construction
In Dayton and Cleveland, development hasn’t heated up as quickly as other markets in Ohio, but these two markets are slowly starting to make a positive turn. Dayton’s largest construction project underway is Procter & Gamble’s $89 million, 1 million-square-foot facility in Union. ProLogis was selected to build the facility, which is expected to open in 2015 and will create 800 new jobs in the Dayton area.
In Cleveland, several build-to-suit projects are underway, but speculative construction has not picked up yet. The employment rate for the construction industry in Cleveland is still 16 percent below the pre-recession rate. As the economy continues to improve in northeast Ohio, construction will increase, resulting in more construction projects and jobs in the next two years.
Projects currently under construction include Nestlé USA’s 144,000-square-foot, $53 million facility in Solon and U.S. Steel Corp.’s plant expansion in Lorain.
With the increase in construction and speculative development in Ohio, vacancy rates should start to stabilize. Colliers | Ohio expects the vacancy rate for industrial product to bottom out around 6 percent to 6.5 percent in the next 18 to 24 months as new product becomes available and boosts the overall supply of space. All in all, construction activity is up, which is a good sign for the Buckeye State.
— By Brian Graham, CCIM, director of research, Colliers|Ohio. This article originally appeared in the September 2014 issue of Heartland Real Estate Business.