Area Economy

Industrial market is improving but expect soft quarter

September 24, 2012
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According to CBRE Econometric Advisors, industrial market fundamentals have continued to improve across the country, with the national availability rate settling at 13.2 percent in the second quarter of 2012, down from 13.5 percent in the fourth quarter of 2011.

During the same period, Kent County absorption was also positive, and average vacancies dropped accordingly.

Local market vacancies for leasable industrial space fell from 15.6 percent in 4Q11 to 14.7 percent in 2Q12, and gross space vacancies dipped from 9.1 percent in 4Q11 to 8.8 percent in 2Q12.

It appears that industrial lease rates have hit bottom throughout the market. Tenants of all property types and submarkets are seeking to secure higher-end amenities in improved locations, or to enter into “blend and extend” transactions or “flex space” options in which to lock in currently favorable rent and lease terms.

In general, lease rates over the past six months have remained flat; however, it should be noted that landlords are regaining pricing power for the best space, and rent and tenant improvement concessions are no longer guaranteed during lease negotiations. Instead, they are being reserved for long-term lease commitments.

For example, a new five-year lease may now qualify for only two or three months of free base rent outside of the lease term. In addition, tenant improvements previously included in base rental rates may now be amortized over the lease term and passed on to the tenant.

Over the past six months, the majority of leases tracked in the market involved smaller blocks of space; however, notable lease transactions during the first half of 2012 include NBHX, which renewed its lease for 117,225 square feet in the NW Submarket; ABC Group, which leased 105,733 square feet in the SE Submarket; Serve-U-Success, which leased 90,000 square feet in the SW Submarket; and Corium International, which leased 67,375 square feet in the SE Submarket.

Meanwhile, continued foreclosure activity, coupled with record-low interest rates, has prompted industrial users to seriously consider ownership.

The Kent County market saw a significant increase in sales activity this period, including the 164,348-square-foot warehouse building at 2200 Oak Industrial Drive NE, sold to Kent Manufacturing Co.; the 147,000-square-foot distribution facility at 4633 Patterson Ave. SE, sold to Traverse City Containers; and the 62,769-square-foot investment sale of the new Federal Express distribution building at 5454 52nd St. SE.

The supply cycle remains tempered for both build-to-suit and speculative space. A 100,000-square-foot addition was constructed for Challenge Manufacturing on Fruit Ridge Avenue NW; a 28,896-square-foot facility was recently constructed for Netech at East Paris Avenue and M-6 (SE Submarket); and a 41,600-square-foot speculative building at 3710 Northridge Drive NW is nearing completion.

Although we believe industrial demand for large box space of premium quality will trend positive, it will likely be a bumpy recovery given weakening headline economic indicators.

U.S. economic data has been disappointing, leading to diminished predicted growth. The overall economy, consumer spending, international trade and the broader manufacturing sector are among the key drivers of industrial demand, with all pointing to a soft patch through at least the next quarter.

Jill Langosch is vice president of research for CBRE/Grand Rapids. She can be reached at jlangosch@cbre.com

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