Warehousing segment continues to struggle

December 4, 2010
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It’s been a key segment of the region’s industrial real estate market — and not that long ago it was seen as an anchor. But this year, warehouse and distribution space has been the industry’s poorest performer from an occupancy perspective.

“The warehouse-distribution space has been the weakest spot in the industrial market. It has been the segment of the market that has the most inventory and had really just the least activity. So it truly was the weakest section of the industrial market over this past year,” said Duke Suwyn, president, CEO and principal of commercial real estate firm Colliers International West Michigan.

The region has more than 22 million square feet of warehousing space. According to Colliers International WM, more than 14.3 percent of that space was vacant at the end of the first quarter. The vacancy rate translates into nearly 3.2 million square feet of empty warehouse and distribution space. But, perhaps, some of that vacant space could begin filling-up in the near future because the manufacturing segment of the industrial market has done well lately.

“If you look at the other side of the coin, the manufacturing side of the world is really extremely busy. There is almost no inventory of heavily infrastructured manufacturing buildings. There are very few buildings left that have a manufacturing infrastructure that is available. Those buildings have slowly and steadily been absorbed, and we haven’t had any new inventory there,” said Suwyn.

Suwyn pointed out that in the past, automotive and office furniture manufacturers and food producers typically stored their products in warehouses, and were large and constant pieces of that segment’s business. Now, however, he said automotive and office furniture manufacturers are operating on a “just in time” basis, so neither has the same need for storage space as they did years ago.

“All the manufacturers are busy, but they’re not building excess inventory and storing it in a warehouse,” he said.

“Food is still very active. But food will never suck up the amount of square footage that office and auto used to because it’s got a higher turn,” he added. “But the reality is, in both areas — manufacturing and the warehouse — we’re seeing progress.”

The progress Suwyn referred to is clearly being led by the manufacturing side of the industrial real estate market. He said the gains being made in that segment will eventually drive a need for additional warehouse space. “It just has to,” he said.

“When manufacturing facilities shrink, they typically take their least used warehouse space and move everything back into their operations. We’re getting to the point now where everybody is at capacity. They have to get their plants to be completely efficient, and part of that means pushing out into the warehouse-distribution segment,” he added.

Suwyn said his firm has seen movement in that area accelerate this year. But he also noted that it is going to take time before the push-out he spoke of pumps up the warehousing segment.

Despite a bad year for warehousing space, Suwyn felt one sector of the segment has done well the past few years: the southeast suburban area that surrounds Gerald R. Ford International Airport. He said if someone needed, say, 200,000 square feet of distribution space two years ago, it would have been fairly easy to have found a building there that size — and there likely would have been as many as five choose from. But that isn’t the case today.

“Today, there are very few options left. Things are filling up in the airport area. That has been a strong area. We’re now down to where there are a lot of 50,000-foot options, but there are very few over 100,000 anymore,” said Suwyn.

“So it has been steadily picking up, I would say. But the manufacturing side today is extremely active and it’s going to drag the warehouse segment along.”

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