Wanted tall white bright nice and clean

May 6, 2012
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The Commercial Alliance of Realtors recently pointed out that the sale of industrial buildings fell slightly during the first quarter of this year when compared to a year ago. Sales dropped by 8 percent over that period, but volume nosedived by 64 percent to just $6 million.

As a result, CAR President Mary Anne Wisinski-Rosely, of NAI Wisinski West Michigan, suggested that the decline in sales — and the much larger dip in sales volume — mean that new construction is needed in the sector.

NAI Wisinski’s Stu Kingma and First Companies’ Ty Hallock, both specialists in the industrial field, agreed.

Kingma said there is a perception in the market that an industrial buyer has a wide variety of building types to choose from, but reality says otherwise. He said the recent success the market has experienced, through either sales or leases, has removed a lot of product from the inventory.

“That was a good thing. The market has certainly transitioned from what it was to a much more positive footing,” he said.

But Kingma added that it’s difficult to match potential buyers who are looking for quality industrial buildings with that type of structure locally. Instead, he said, there are a lot of “tired assets” out there, meaning 30- to 40-year-old buildings with low ceilings, multiple additions, and structural problems that may not have been properly addressed.

“There is still a relatively large supply of those. But the reality is, in today’s manufacturing and distribution perspectives, those things are obsolete and just not attractive. So when you transition to ‘I need something that’s tall, white, bright, nice and clean, and functional in terms of today,’ the supply is just no longer there,” said Kingma.

Although some of the older facilities have received facelifts and become more useful, Hallock felt there aren’t a lot of good, functional buildings, especially those with high-efficiency lighting, in the area. He said he was close to selling one of the last, best, available buildings, and when that one is gone, the market will be even less attractive.

But the demand for quality will still exist.

“We certainly have a few of our folks that are pushing us on some new industrial facilities that are kind of coming aboard in the next, call it, six to 12 months. We’re well down the road with some people in terms of some expanded space that creates more opportunity for capacity. It’s a unique threshold — new versus existing,” said Hallock.

“The issue is, if you look at our bread-and-butter in West Michigan, which is the 20,000- to 50,000-foot building, there just aren’t a ton of quality buildings in the marketplace,” he added.

Hallock said the shortfall didn’t come about solely because of new companies coming into the area. It has also surfaced because existing companies have grown bigger and need more space.

“(Those in 30,000-square-foot buildings) are looking into 50,000 feet. They’re looking for places to expand or for a newer facility where they can gain some efficiencies in production and how they lay out their business. So we’ve certainly had those phone calls and discussions with folks more lately than what we’ve had in the last few years, that’s for sure,” he said.

Kingma said the market has to begin putting some shovels into the ground. But the challenge to that is, as one might expect, the cost of building new. He said the price tag to put up a new, modern plant is high, primarily due to the cost of construction materials.

“Steel is a whole lot more expensive than it was five or 10 years ago. Concrete is the same thing. Copper is extremely high. So all of that compounds to result in high construction costs,” he said.

Kingma said another factor coming into play is that the methods being used to appraise existing plants and warehouses can deter new construction. There are three ways to make appraisals: by cost, income and market factors. Kingma said the income and market methods have been used the most. He said appraisers haven’t used the cost approach very often because, for the longest time, there was enough inventory in the market.

Now that the stock of available buildings has dropped, Kingma felt the cost approach needs to be strongly considered because that method better reflects the price tag that comes with new construction than the other two methods.

“When you sell a building and you finance it, obviously, a key component of that is the appraisal. In a rising market — and it certainly is trending in a higher direction — appraisers need to be cognizant of that. Otherwise, we’re going to end up in a circumstance where you’re going to pay a dollar for a building and it’s only going to appraise at 85 cents. Then you have a lending problem,” he said.

“It requires a different mindset today than it did just 12 months ago.”

Hallock felt there still are a few opportunities for companies to find what they are looking for, and he added that building new isn’t always the most cost-effective way to go. On the other hand, he said some businesses can’t afford not to go with a new building because of the efficiencies it can offer.

“You can’t look at real estate just on an existing-versus-brand-new basis. I don’t think the numbers are quite there yet, as they don’t say you should definitely build instead of going with something existing,” he said. “But I think we’re definitely in the position now where people are starting to look a little more favorably at building because you can get exactly what you want.”

For those who choose to build new, Hallock felt the financing is available. He said people are talking with more bankers now than they were able to just a few years ago — a sign he interprets as meaning lenders are more interested in making good deals.

Hallock also noted that, while loans went from being too easy to get to not being available at all, overall, one thing has remained constant.

“All along and in between, there are the deals that have always made sense since the time of the Stone Age, and those don’t change. If you’ve got some money down and you’ve got a good game plan and you’ve got some good financials, you can find money,” said Hallock.

Despite the current difficulties in building new, Kingma said new facilities are possible in the near future and, at some point, have to be built. He said he has heard that such construction projects are on the drawing boards, and the numbers are being run.

“But the challenge the buyers and the end-users are running into is just exactly how much money a new building costs. With a mindset that, ‘I can go buy a used one for 20; I ought to be able to buy a new one for 25 or 30,’ but the reality is the number is probably closer to 40 or 45,” said Kingma.

“So how do I go from buying a used building to a new building that is going to cost me almost twice as much? And that is, in broad strokes, what we’re being faced with right now.”

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