Toledo’s Industrial Market Is in Need of Large-Format Speculative Construction
A snapshot of Toledo’s industrial real estate market at the end of 2016 reveals a well-performing sector, maintaining the steady improvement recorded during the prior year. In fact, the vital signs of the property sector hit some of their best levels in a decade last year. By the end of the year, every key metric was up from midyear 2016 and year-end 2015.
One bit of cloudiness trying to sneak in on the otherwise very sunny picture, however, is the limited supply of available space options. Demand clearly exists for additional space, but users are unable to find options that fit their needs. The dearth of adequate space alternatives is restraining potential transaction volume and, by extension, probable job growth.
By Toledo standards, the market has been absorbing an impressive amount of space over the past several years. Overall, the 85 million-square-foot market absorbed 763,065 square feet in the second half of 2016.
However, as strong as the absorption numbers have been, it is easy to speculate they would be much higher if more of the right kind and sizes of space existed in the market. There is a shortage among all building sizes, but the need is most acute for buildings ranging from 10,000 to 50,000 square feet and from 150,000 to 300,000 square feet.
Analysis of key metrics
The vacancy rate for the metro area finally fell below 6 percent to 5.9 percent at the end of 2016, reaching its lowest level in 10 years. The vacancy rate among Class A industrial buildings was an even tighter at 3.7 percent. The average asking rental rate climbed to $3.25 per square foot triple net, up from $3.18 per square foot at mid-year.
This increase followed a similar increase in the first half of 2016. Rates were initially slow to respond to the rebounding market following the Great Recession, but now seem to have hit the accelerator. Class A rates also continue to increase and reached $3.70 per square foot at the end of 2016.
North Toledo, home to the Chrysler Jeep Assembly Plant and GM Powertrain manufacturing plant, experienced the largest drop in vacancy and, correspondingly, the highest amount of positive absorption at 614,245 square feet. Given the premium that both GM and Chrysler place on the proximity of suppliers to their plants, this performance is not entirely surprising.
Unfortunately, the statistics on the North Toledo submarket only serve to further underscore the supply-demand gap that the region is experiencing and the sense that it is missing out on opportunities to land more deals due to the lack of suitable space options. This particular submarket recorded a 5.2 percent vacancy rate and an average asking lease rate of $2.98 per square foot at year’s end.
Who’s taking space?
Space users from a wide range of industries have been conducting searches or have completed transactions in the past year. Most of the active searchers have been non-automotive businesses, though there have been some high-profile automotive-related transactions completed or expansions announced.
We are beginning to see more activity centered around Jeep suppliers either entering, leaving or expanding in connection with the evolving production plans at the Chrysler Jeep Assembly Plant. Meanwhile, the other activity is coming from companies in consumer-goods industries and/or manufacturers of non-automotive goods. These buyers and tenants have been seeking warehouse/distribution space as well as manufacturing space.
The biggest story in the second half of 2016 was the amount of space under construction. Jumping from nearly zero at midyear to just more than 1 million square feet at year’s end, the construction total includes a large expansion at GM Powertrain and two facilities being built in North Toledo for automotive suppliers to Chrysler. This increase is great news, except that most all of new construction is
effectively build-to-suit space.
Wanted: spec space
What the market really needs, if it is to capture the opportunities that the current demand offers, is some speculative development of large-format buildings. The same issues of capital constraints and a virtually non-existent developer community in the region, which have kept a lid on speculative development for years, largely explain the limited speculative construction.
During the past 10 to 20 years, institutional owners and developers have shed investments in Northwest Ohio, abandoning it for markets perceived to be less risky or that generate more growth. Today the institutional investor community has little or no presence in the area.
The perception is that developers cannot achieve market rents high enough in metro Toledo to support new construction. But there is reason to be encouraged. The average asking rental rate is climbing in response to the demand and supply imbalance. More importantly, transactions are closing on newer or newly constructed buildings at rates and terms that will support new construction.
—By Harlan Reichle, President, CEO, Reichle | Klein Group. This article first appeared in the May 2017 issue of Heartland Real Estate Business magazine.