The vital signs of Cincinnati’s industrial market are collectively the healthiest they’ve been since 2007, including vacancy, absorption, lease rates, property values and investment sales activity. This uptick is particularly encouraging considering that the recovery in the Cincinnati industrial market lagged the top five markets in this property sector nationally coming out of the Great Recession.
The historical 20-year average vacancy rate for Cincinnati’s industrial market has ranged between 3 and 5 percent, but rose as high as 10 percent in 2008. With overall industrial vacancy on the decline for the past seven quarters, vacancy now stands at 6.35 percent, a five-year low.
Bulk Distribution Space Becomes Scarce
Vacancy in the bulk distribution subsector — large warehouse buildings primarily used to accommodate e-commerce, apparel or consumer goods — has been declining for the past eight quarters and now stands at 7 percent.
That’s a departure from the usual 10 to 13 percent range. In the 29 million-square-foot bulk warehouse submarket of Northern Kentucky, vacancy is less than 2 percent.
Space is so limited that no Class A bulk spaces larger than 200,000 square feet are currently available in Northern Kentucky. VanTrust Real Estate LLC has begun construction on a 273,000-square-foot speculative warehouse and distribution building in Hebron, Ky., and other developers are scouring the market for opportunities.
Only one existing Class A space more than 200,000 square feet is immediately available in the Northwest submarket, although IDI is on track to complete a 650,000-square-foot speculative building in Monroe, Ohio, this summer.
So what’s keeping the lid on speculative buildings? Fully entitled sites in great locations with adequate infrastructure are in short supply. Lenders’ relatively strict underwriting standards, plus investor expectations for higher returns on equity, also are keeping oversupply in check during this recovery.
Build-to-suits, however, are a different story. We expect build-to-suit development to increase throughout 2014. PrimeSource Building Products is pursuing a 200,000-square-foot build-to-suit in Florence, Ky., and another international freight company is in search of a 30-acre site near the airport to build 200,000 square feet.
Absorption Remains Healthy
Yet another sign of growth in this market is total net absorption, which reached 5.1 million square feet in 2013, the highest in eight years. The market has recorded 10 consecutive quarters of positive absorption.
With the exception of one quarter, total net absorption has exceeded 450,000 square feet every quarter since the third quarter of 2011. In fact, net absorption reached more than 1 million square feet in five of the last 10 quarters.
Additionally, annual gross absorption totaled more than 10.7 million square feet in the Greater Cincinnati industrial market in 2013.
In the past eight years, gross absorption in this market has exceeded the 10 million-square-foot mark two other times, in 2006 and 2011. These figures demonstrate an increase in transaction activity, which leads to job growth.
With high demand and low supply, lease rates are increasing. The average asking lease rate for Class A bulk space was $3.21 per square foot triple net at the end of the fourth quarter of 2013. However, current demand for limited space is pushing rates closer to $3.50 per square foot triple net.
In 2014, expect to see an increase in lease rates for newer Class A bulk distribution space for the first time in many years. This is good news for the landlords, who will ultimately see an increase in property values after losing almost one-third of their value following the recession.
Investment Sales Magnet
Another indicator that points to a strong market is investment sales activity. Several institutional owners new to the market such as Hackman Capital Partners, Liberty Property Trust and JP Morgan Asset Management have invested large sums in industrial properties across the metro area. Through both one-off transactions and as part of national portfolio sales, capital flows to markets like Cincinnati confirm the rebound of the metro area.
REITs such as Welsh Property Trust and pension fund managers like Cabot Properties continue to invest here. These two companies have expanded their holdings recently by more than $50 million combined. The most recent industrial investment sale garnered an unprecedented cap rate in the low 6’s.
To use a baseball analogy, the Cincinnati industrial market is poised to hit a home run in 2014 in light of its current deal momentum and solid real estate fundamentals.
— By Jeff Bender, SIOR, CCIM, Executive Managing Director, Cassidy Turley. This article originally appeared in the April 2014 issue of Heartland Real Estate Business magazine.