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Speculative Construction Remains Rare Despite Toledo’s Tight Industrial Supply

The Toledo industrial real estate market continued its steady improvement in the second half of 2015. Tenant demand for space was solid at a time when virtually no new speculative space was added, which led to a shrinking vacancy rate. At the end of 2015, the vacancy rate stood at 6.8 percent, down from 7.2 percent at mid-year and 7.7 percent at the end of 2014.

The market absorbed 564,947 square feet in the last half of 2015 on top of the 632,775 square feet absorbed in the first half of the year.

With vacancy rates contracting, the overall average asking rental rate in the Toledo industrial market rose 10 cents to $3.14 per square foot between June 2015 and the end of the year. We have commented in prior reports on the dearth of new speculative construction in the region. This trend continues. Only one speculative building has been constructed in the market since well before the Great Recession.

That building — a 100,000-square-foot warehouse/distribution building located in Overland Industrial Park in the North Toledo submarket and developed by Harmon Family Properties — was delivered in the second half of 2015. As of December 2015, the building was still vacant.

Without question, the relatively low rental rates continue to be a hurdle when it comes to the construction of new

Harlan Reichle Reichle|Klein Group

Harlan Reichle
Reichle|Klein Group

industrial buildings. There are examples of Class A buildings that have leased in the $4.50 to $5 per square foot range, which is the range at which new construction is viable.

However, the developer community in the region is very small and there are really none with the financial wherewithal to build a 250,000-square-foot spec building. The only alternative would be to attract a capable developer from outside the market to do such a project. To date, no such developer has been convinced that if it were to build in the Toledo area, the tenants would come and pay the rent necessary.

The tightening supply has led a growing number of space users to resort to build-to-suit construction or the expansion of existing facilities to satisfy space requirements.

Two of the three projects delivered in the second half of 2015 were facility expansions. The only space under construction at the end of 2015 was a building expansion by owner-occupant Betco Corp. Betco, a cleaning products manufacturer, acquired a 242,500-square-foot former Cooper Standard facility in suburban Bowling Green, Ohio, to consolidate operations in several older facilities located in an urban Toledo submarket. Betco is adding 192,000 square feet to the Bowling Green building to accommodate its operations.

We see significant pent-up demand among users who prefer to purchase facilities rather than lease. We represent many buyers on the sidelines who are unable to find acceptable building options within the existing inventory of buildings for sale. Pricing is rarely, if ever, the issue.

The price per square foot for existing buildings, while rising, is still a fraction of the cost for new construction. Because of the limited building options, certain building features are difficult to overcome such as physical size, configuration, condition, location and access.

Either the cost of new construction cannot be justified for many of these would-be buyers, or their current sites will not accommodate expansions. Consequently, these parties sit and wait, incurring the opportunity cost associated with the inability to get into larger or better facilities.

Diversifying economy a plus

Long playing a huge role in Toledo, the automotive sector has been very good to the community and the industrial market. We love the automotive industry, but we are always thrilled to see growing diversification in the local economy because it broadens the demand drivers in the industrial landscape.

Lately, there has been a lot to cheer about. During the past several quarters there has been a much smaller percentage of industrial real estate transactions involving auto-related space users. This tendency likely relates somewhat to model life cycles and vendor contracting periods with Chrysler and General Motors Co.

We are also seeing more deal flow from other segments. For example, the biggest transaction in the second half of 2015 involved a renewable energy company, First Solar Inc., which leased the 400,000-square-foot former Ace Hardware building in Perrysburg Township.

InSite Real Estate acquired the building recently on a speculative basis. In addition to the renewables sector, there were transactions in the second half of 2015 with users in the agriculture, wholesaling, consumer goods and general manufacturing sectors.

By Harlan Reichle, President, CEO, Reichle|Klein Group. This article originally appeared in the March 2016 issue of Heartland Real Estate Business.

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