Warehouse market Remains in good shape

December 5, 2008
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Even with the state's economy struggling, warehousing and distribution space has increased in the metro market since 2005 and the vacancy rate has fallen by nearly 5 percent.

According to reports from Grubb & Ellis|Paramount Commerce, the square footage of warehouse space grew by 1.9 million square feet since 2005 to 21.6 million square feet this year. At the same time, the market's vacancy rate fell from 16.6 percent in 2005 to 11.8 percent this year. Lease rates have remained steady across those years.

GE|PC industrial advisor John Kuiper felt the major reason for the growth in space and the drop in vacancy was that a new large warehouse hasn't gone up here since 2003, when the Robert Grooters Development Co. built one with 250,000 square feet.

Kuiper said another key factor occurred back in 2000 when a local third-party logistics company lost a contract and put 1.2 million square feet back into play, which immediately made the vacancy rate soar and softened the demand for space.

"Lastly, you had manufacturers becoming more efficient and pulling back a little bit. So they were stuffing everything they could in their own buildings instead of going to outside leased space," he said.

Randy Bronkema, also an industrial advisor at GE|PC, said a pullback on building new warehouses kept the market in check, allowing it to fill and add space as needed.

"Whenever you don't over-build the market, demand usually increases and you don't have vacancy increases. If you keep putting buildings on the market when there isn't a demand, you always get high vacancies and that hasn't happened," he said.

Kuiper said the region has been fortunate, too, in not having a lot of outside developers come in, buy land and build space because that leaves control of the market in local hands.

"When it's more of a local market, you can shut the spec construction down very quickly. If we didn't realize what had happened and we kept building and building, and there was a 24-month lag time, our vacancy would have really spiked," he said.

Bronkema noted that the timeframe it takes to build warehouses in contrast to office and residential projects is much shorter — like six to eight months versus a few years. So this type of space can come on the market quickly and go at least partially unnoticed until all the construction is done.

Of course, the economy has worsened since 2005, but right now Kuiper said the market is in good shape, as asking rates have stayed constant. For the past 15 years, he said triple-net lease rates have remained between $2.95 and $3.10 per square foot. In fact, he said Grooters Development recently lowered its rate from $3.10 to $2.95.

Kuiper added that effective rates, which include landlord concessions, have risen over the years. Bronkema felt that the asking rate might fall somewhat next year as he said landlords are becoming more motivated to fill empty spaces.

"You've got two different directions to go. One, you've got banks breathing down the necks of landlords for performance. They want to get deals done so they may be more inclined to give more free rent or provide more concessions," said Kuiper.

"On the other hand, banks are not really interested in financing properties for those potential users if they want to buy," he added.

Back in July, Kuiper told the Business Journal that banks would push firms toward leasing space instead of buying a building because lenders wouldn't be financing such purchases. And when banks don't lend, the demand for leaseable spaces rises.

"There are no more 100 percent financed deals. There are no more 90 percent financed deals. Buyers have to come to the table with at least 20 percent equity. A $3 million project means you have to have $600,000 out-of-pocket — and that's substantial dollars today," he said.

Kuiper also said interest rates on loans haven't varied nearly as much as the required equity. Banks are still lending, he said, but only to very high-credit borrowers.

"The lending criteria has stiffened, I would call it, and has gotten very selective. I don't know if I'd say none of them are lending, but it's very selective — for someone with sterling credit and in industries that are growing and expanding. But not for industries that are not doing so well and are suspect to further contraction problems," said Bronkema.

As for what will happen in the market next year, Kuiper said the forecast is blurry. Like the numbers being reported on Wall Street, the warehouse market will either go up or down.

To make his point, Kuiper asked who would have predicted six months ago that the Dow Jones Average would fall to 7,500 just a year after it reached an all-time high of 14,000, and that a gallon of gasoline would sell for $1.70 only a few months after it topped $4.

But Kuiper and Bronkema were fairly certain there wouldn't be any new warehouse construction in 2009 due to tight credit. They also felt that asking rates will dip because landlords want to fill spaces, a move that will give tenants more opportunities. Bronkema thought more retail warehouse space would become available because retailers will lower their stockpiles and keep inventories smaller until the economy stabilizes.

Even though now may be a good time to make a move in the market — such as negotiating a new lease — Kuiper felt at least some would delay taking any action for the immediate future.

"Looking into 2009, it's a year where the forecast is blurry. You've got a lot of uncertainty in the market. You've got the Big Three automotive, where it's not as bad as everyone thinks it is, but on the other hand, it's got people hesitating," said Kuiper of the warehouse market.

"As long as there is an excuse to hesitate, it reduces the urgency. It may not impact the demand as much as the urgency. Most people are trying to push back and say, 'I'm just going to sit and wait.'"

More space, more filled

THE METRO MARKET added 1.9 million square feet of warehouse and distribution space over the past three years. Despite the additional square footage, the vacancy rate fell by nearly 5 percent over that period. Asking rents for leased space also dropped slightly.

Here is a comparative look at the warehousing market in 2005 and this year.


Year
2008
2005

Total Square Footage
21,634,353
19,784,893

Vacant Square Footage
2,558,862
3,283,086
Vacancy Rate
11.8%16.6%
Asking
Rent
$3.17
$3.22
Source: Grubb & Ellis|Paramount Commerce Industrial Market Snapshots

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