Industrial Market Vacancies Rise

August 1, 2003
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GRAND RAPIDS — Chances are pretty good that the vacancy rate in the metro industrial market will rise by a half-percent to a full percent by the time the year is over.

Still, even with more unoccupied space for lease, it’s likely the local market will close the year well under the national vacancy rate average.

The local market’s vacancy rate has risen and dropped like a roller coaster since 1998. Then, it stood at about 3.5 percent. Two years later it was 4.6 percent, but fell back to 3.7 percent in 2001.

Last year, however, the industrial market vacancy rate reached 6 percent, and this year it may make 7 percent. But brighter days could be just down the road.

“The reality is, I think we have hit bottom in the last two or three months,” said Duke Suwyn, CEO of Grubb & Ellis/Paramount Properties.

“Are we on the road to recovery? I think, yes. Why are we on the road to recovery? Because I think we have minimal new spec construction,” he added.

No new construction is largely good news because there is enough space available now, and overbuilding would just make matters worse for current owners, as lease rates could fall even further.

Last year, the average asking rent for warehousing space was $3.25 per square foot — $5.14 in the research and development and flex category.

The segment suffering the most is warehousing. It’s the second largest in total square feet; only general industrial is larger.

But it has the highest vacancy rate of the market’s four product types, nearly 20 percent. Of its 13.5 million total square feet, more than 2.67 million square feet was unoccupied last summer.

“We are a manufacturing economy. When production slows down, the excess capacity is almost always in the leased facilities,” Suwyn said.

“Core manufacturing is typically owned, but their excess is in their leased facilities. And when the economy slows down, they start exiting those leased facilities and pull back into their owned facilities,” he added.

Grubb & Ellis/Paramount Vice President John Kuiper said that the low cost of money has also contributed to more vacancy, at least for the leasing side of the industry.

“Businesses that were tenants have gone out and purchased their own facilities,” he said.

For example, Suwyn said one company recently left a 200,000-square-foot leased building because it bought an existing structure with more than 300,000 square feet. So the market absorbed 100,000 square feet — a good thing — but then another big box went on the listing.

And, by the end of the year, more square feet will likely be listed in the general industrial sector, which contains the manufacturing facilities. A year ago, 3.3 million square feet were on the market, and with a couple of plant closings since then that number should go up.

But Suwyn said sub-lease space, in general, is either expiring or getting filled, and that the market would begin to see increasing absorption and lease activity. It will take a while to fill much of the inventory, though. Sales of industrial buildings, however, remain strong.

“It’s a unique time in history, where you can almost buy cheaper than you can lease,” said Suwyn.

Most of the vacant industrial space can be found in the southeast submarket, the region’s largest sector with nearly 39.8 million total square feet, and 9.3 percent of it — almost 3.4 million square feet —  was unoccupied last year. The southwest sector had the second-highest vacancy at 6.8 percent. But the north side is a different story.

Although much smaller than the south side submarkets, those to the north are nearly full. The northeast sector has 13 million square feet and only 1.6 percent of it, or 205,230 square feet, was vacant last summer.

The northwest submarket registered almost as well on the vacancy meter, as only 2.9 percent of its 19.4 million square feet was without tenants.

“There rarely is a vacant building in the northeast sector for any period of time,” said Kuiper of a fairly landlocked area that is unlikely to see any growth.

In contrast, the northwest submarket is seeing growth, and possibly could have more if more land became available.

So even if the vacancy rate reaches 7 percent at the end of the year, it will almost certainly be lower than the national average.

The nation’s industrial vacancy rate was 9.45 percent at the start of the year, and forecasters early in the year didn’t think that number would fall very much.

In fact, there were only five markets in the country with a vacancy rate below the local rate at the start of 2003: Los Angeles and Bakersfield, Calif., South Bend, Ind., Honolulu, and Madison, Wis.

In contrast, there were 52 markets with higher vacancy rates than Grand Rapids then, and 17 of those were above 12 percent. Cleveland and Columbus, Ohio, Des Moines, and Oklahoma City were among those holding that distinction.

Raleigh-Durham, N.C.,  wore the vacancy crown with a rate that topped 21 percent.

Closer to home, Chicago was at 9.2 percent in January and Detroit was at 9.9 percent.

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