Industrial real estate market seeks recovery
According to Colliers International of West Michigan, the industrial real estate market ended 2010 with some significant signs of recovery following seven quarters of negative and non-existent growth.
The firm reported that nearly 237,000 square feet were absorbed for the year — a massive improvement from 2009 when 1.7 million square feet were vacated. Vacancy stood at 8.8 percent at the end of 2010, which was down a tad from the 9 percent rate a year earlier.
Colliers International/WM Research Analyst Jeff Williams pointed out in the report that leasing activity rose last year, as did the average size of each transaction. According to the firm’s data, the average industrial lease in 2010 topped 16,000 square feet. In the previous year, the average lease was 8,100 square feet.
There were 95 industrial leases made last year, up by 10 from 2009. Fifteen leases closed during the fourth quarter, which was down from the 30 that were signed in the previous quarter. The average asking rent last year was $3.08 per square foot on a triple-net basis, down a penny from the 2009 rent.
As for sales, 33 were reported last year compared to 21 in 2009. The average sales price was $456,000 last year, up by 14 percent from 2009.
“Our professionals are seeing well-located Class A industrial properties with solid infrastructure selling at improved pricing. On the other hand, functionally obsolete and distressed buildings are selling for dramatically decreased prices,” wrote Williams.
“This reiterates the adage of ‘trophies and train wrecks,’ where quality assets are selling because of their exceptional fundamentals and lower-tier properties are selling simply because of cheap pricing,” he added.
Colliers International/WM doesn’t expect to see a lot of new industrial construction this year. It does expect sales prices to rise to the “normal” level of 2005 but not to the “unusually high levels” of 2007, the year the residential real estate market began its swan dive and started the commercial market on its downward spiral.
“We predict that banks will continue to dispose of Real Estate Owned properties on their books and will take a significant loss on anything other than Class A assets. For 2011, it will almost seem as if two separate markets exist as the Class A market improves and REO and Class C properties continue to struggle,” said Williams in the report.
The report also projected that leasing activity, vacancy and rental rates would continue to recover this year but at a slow pace. The metro industrial market has 114.1 million square feet; 10 million were vacant at the end of 2010.
Sales and leasing activity in the office real estate market also rose last year. Forty-nine properties with a total of about 600,000 square feet changed hands in 2010. That represented a gain from the 31 sold in 2009, which accounted for 200,000 square feet.
The report went on to say that there were 223 office leases completed last year, up from 170 in 2009. In addition, the 2010 leases were for an average of nearly 5,800 square feet, more than double the 2009 average of 2,200 square feet. The early expectation is that momentum should continue this year.
“With the local economy posting reasonable growth and the addition of more private sector jobs, the overall West Michigan office market is expected to improve in 2011. Expect rental rates for downtown office space to stabilize and vacancy levels to decrease slightly in 2011,” said Williams.
“Overall, the number of transactions will increase with users realizing that the market has bottomed out, and now is the time to act before prices increase,” he wrote of the downtown market. “Landlords will begin to tighten up and hold their ground on incentive packages as the demand for space increases.”
Downtown, with 5.6 million square feet, finished the year with a 22 percent vacancy rate. Class A rents averaged $22.36 per foot, and Class B rents went for $16.03. Suburban offices have 13.5 million square feet with 3.4 million square feet lacking tenants, for a 2010 vacancy of 25.3 percent. Class A rents in the suburbs averaged $19.35 last year, while Class B rents went for $14.52 a foot.
“The suburban office market, on the other hand, has not yet bottomed out and rental rates will continue to decrease to some extent,” said Williams.
“(But) even with the suburban market lagging behind downtown, the overall office market in West Michigan will begin to strengthen in small increments with no sudden surge anticipated,” he said.
The overall metro office market had 19.1 million square feet of space last year, with 4.6 million square feet vacant. The data from Colliers International/ WM pegged the 2010 vacancy rate at 24.3 percent.