BOSTON
The Massachusetts’ industrial market struggled during the first half of 2004 with a number of large warehouse facilities emptying onto the market.
The second half of the year witnessed a modest improvement with respect to absorption, but not enough to correct the negative numbers earlier.
The industrial market posted a fairly flat year overall,except for the North submarket where there was nearly 1 million square feet of negative absorption.
The Central submarket, which commanded the highest demand for industrial space in 2004, likely will be the most popular again in 2005. Its proximity to land, sea and air transportation centers, combined with excellent distribution and warehouse facilities, secures its continued importance as a submarket.
Overall, the market will see relatively flat absorption and rental growth during 2005. The lagging regional economy will continue to stall industrial expansion as the job market remains weak for the first half of the year.
The second part of the year should see rents rise softly as improvements from the national economy are realized locally.
R & D;/flex space should continue to be the most popular form of industrial facilities this year. Companies who use this type of space continue to expand within the state.
In general, companies focusing on medical device research and development, along with companies with a biomedical focus will continue to thrive in the Massachusetts economy and seek additional R & D;/flex space.
In addition, there is opportunity for modern design, high-bay industrial space to be developed in Massachusetts to meet a growing demand. Conventional warehouse space likely will continue to struggle in some submarkets of Massachusetts during 2005, in part due to the regionalization of the industry.
New construction is limited primarily to non-speculative development. This trend is not expected to change in 2005.
Expect the greater Boston industrial market to stabilize in the coming year. The creation of jobs within certain sectors of the industrial economy will be the limiting factor to how well the market expands in 2005.
Incentives such as periods of free rent and tenant improvement allowances still will be an important part of many lease negotiations.
Vacancy should begin to edge down toward the second half of the year as absorption begins to react to some of the positive fundamentals in the economy.
It will continue to be a renters’ market in 2005. In the meantime, expect rents to hold firm across all industrial property types with a view towards R & D;/flex space potentially offering landlords opportunity for rental gains earlier than other building types.
CHICAGO
Buoyed by its sheer size, absorption and vacancy rates, Chicago’s combined industrial sectors should continue to positively ride the market. Overall positive absorption will steadily increase, fueled by big-box leasing transactions and build-to-suit activity.
Asking rental rents, currently at $4.27 per square foot per year for warehouse/distribution space and $8.65 for R & D;/flex, are expected to hold steady.
In Chicago, the heart of Middle America, logistics and transportation have overtaken traditional manufacturing as a growth engine for the industrial markets.
With 8,000 miles of class A rail, 1 billion square feet of industrial buildings scattered across Cook and its surrounding “collar” counties, 17 airports and 25,000 miles of arterial highways conveying the nation’s trucking industry, Chicago retains traditional dominance as a main hub of the supply chain of consumer goods flowing in and out of the U.S.
Twenty-five percent of international trade coming through U.S. ports reaches Chicago. According to the recent statistics, shipping and distribution account for 10.8% of the gross metropolitan market, with $42.2 billion dollars being pumped back into the regional economy.
Improved efficiency of transportation is, after all, the principal component of the new global economy, and Chicago has evolved into a major player on the world stage.
Drawing upon an earlier era of our history, when the nation’s rail system converged on the Windy City from all points, the modern city of Chicago is riding the wave of the future as manufacturers and suppliers look to Intermodal rail to move goods.
With anxiety over rising prices of crude oil, a shortage of qualified over-the-road drivers, and new restrictions and requirements imposed upon the trucking industry by Congress, intermodal is becoming a more efficient and cost-effective way of doing business.
Chicago has the infrastructure to support six class 1 railroads traversing the region. It has evolved into a high-end warehousing and distribution market, given its central location and available space.
The China trade has helped bolster Chicago’s position as the third largest shipping hub in the world, with only Hong Kong and Singapore surpassing the city in annual container volume.
Distribution and logistics are redefining the dynamic of the retail supply chain. Cognizant of the dollar ratio of their real estate costs (5% of the total pro forma) versus shipping (on average $5 are spent transporting goods to every dollar expended on warehousing), new build-to-suit warehousing is more likely to be situated in the once remote “greenfield” locales like Rochelle, Minooka, Ottawa and Peru,all serviced by rail.
Retailers are benefiting from faster product movement between overseas destinations as a result of the opening of DP Partners’ 300-acre masterplanned LogistiCenter at Rochelle in 2002 and its first “spec” building, a 572,375-square-foot facility that opened in 2004, along with CenterPoint’s nearby 362-acre Intermodal Center that’s near Union Pacific’s Global III Yard in the I-39 Corridor.
As a result of such rapid expansion and development, coupled with cost savings on imported raw materials through attainment of Foreign Trade Zone status, the local container business is expected to increase by as much as 20% a year.
The demand for faster supply chains, higher ceiling heights and increased trailer parking is driving building design. Developers debuted several noteworthy 2004 big-box openings in Northeast Illinois industrial markets, including TNT Logistics North America Inc. in Monee, Home Depot Inc. in Romeoville (I-55 Corridor) and Wickes Furniture in Carol Stream.
Since 2003, developers chasing the flourishing distribution market have broken ground on 19 spec buildings along the busy I-55 Corridor.
Nearly 8 million square feet of new construction was finished in 2004 including Dollar Tree’s 1.2 million-square-foot facility and the 693,000-square-foot Michael’s build-to-suit in Central Will County.
Target inked a deal for a 1.5 million-square-foot build-to-suit warehouse in DeKalb at Park 88, and Sony Music Corp. renewed a cumulative 711,000 square feet at two nearby locations in Bolingbrook.
Along I-394 further east, development of International Crossings, a new 457-acre mixed-use business park in suburban Sauk Village (adjacent to five intermodal yards) is under way. It is set to service a five-state corridor from Iowa to Michigan, Indiana, Wisconsin and Illinois.
Projects under construction this year will produce nearly 10 million rentable square feet of space, though only 20% of it is preleased. With so much new space coming on the market, particularly along I-55, excess capacity and higher-than-normal vacancy rates are not an unexpected development.
Adding to the slow but measured recovery in 2005 will be ProLogis’ 535,000-square-foot speculative development in Romeoville, where development projects of this scale are becoming common.
CINCINNATI
Sparse new construction, steady vacancy rates and several large deals at the end of 2004 highlighted the continued recovery of Cincinnati’s industrial market that is set to extend into 2005.
Recovery defined the 2004 industrial market and will continue through 2005, gradually picking up steam as the year rolls on. Three straight years of virtually no new speculative construction has allowed vacancy rates to steady in 2003 and 2004, and they will begin to decline in 2005.
Slightly increasing rents during the new year will spawn new speculative developments, but at a moderate pace due to increased building costs.
Although older manufacturing buildings still present challenges in the market, overall demand increased during 2004 and will continue into 2005. The increase in demand already began to affect the amount of leverage tenants have for incentives.
Expect this increased demand to equate to less incentives for tenants. However, obsolete buildings that cannot be absorbed or converted will likely go to auction in the new year.
Four extremely large transactions,Cornerstone (479,000 square feet), Dell (427,000 square feet), UPS (247,000 square feet) and Jack of All Games (400,000 square feet),were the most notable transactions last year and set the stage for a healthy 2005 due to the impact of positive absorption in large blocks of space.
Otherwise, most market activity can be attributed to smaller tenants with less than 40,000 square feet.
Due to increased construction costs, low interest rates and existing user and investment requirements, buyer demand for existing buildings remains high.
There will continue to be more buyers for buildings than buildings for buyers. Expect the 2005 market to be driven by existing space.
Speculative construction remains sparse, though IDI broke ground on two new speculative buildings (542,000 square feet and 198,600 square feet) in the Northern Kentucky Airport submarket.
This corridor has been a popular location for sizable companies such as UPS, Toyota, Levi Strauss and Wild Flavors. Due to the decreasing availability of vacant land in this region, developers have begun to look south along I-75 for opportunities offering new speculative developments. It is anticipated that announcements will be made this year.
PHILADELPHIA
After a devastating 4.1 million-square-foot flop in 2003, the Philadelphia regional industrial market regained its balance in 2004.
A handful of large transactions put the overall industrial market in a less compromised position last year. While transaction volume was relatively thin compared to historic averages, there were several leases above 100,000 square feet, keeping select corporate downsizings at bay.
However, two significant absorption figures will have to be tallied this year as the projects were under construction when 2004 closed its books.
DHL, the express shipping company, and Electronics Boutique, the world’s largest retailer of electronic games, had warehouse/distribution projects under way in southwest Philadelphia and western Chester County, respectively, totaling 530,000 square feet.
Still, some of the largest transactions of the year occurred just outside the immediate nine-county Philadelphia metropolitan area, along the IH-81 corridor to the west, in the Lehigh Valley to the north, and at exits 7 and 7A of the New Jersey Turnpike towards the northeast.
A partnership between Equilibrium Equities and Liberty Property Trust has shown confidence in the future success of the IH-81 corridor by launching construction on a 750,000-square-foot speculative ware-house/distribution facility.
Sears Logistics Services claimed one of the largest transactions of the year near an IH-81 exit, bunkering down on 455,000 square feet.
Meanwhile, Philadelphia’s western suburbs are aggressively expanding farther from the urban core. Suburban sprawl has become an increasing volatile issue throughout the region, forcing the majority of larger industrial developments to outlying areas as the sheer price of land rises.
Developers are selecting thinly populated areas to build new suburban industrial space, or they are renovating or demolishing existing urban buildings for higher priced office, residential or retail developments.
BET Investments has taken an interest in one of the latest land use conversions; having bought a 147,626-square-foot industrial facility in 2004, the real estate management and development company, plans to convert the property to an age-restricted housing community.
While the Philadelphia region’s manufacturing employment sector still is quite large,about 215,000 jobs or 9% of the region’s employment base,the actual number of payrolls are slipping as an increasing number of jobs are shipped overseas.
The metro area’s industrial market is fortunate as the warehouse/distribution niche is filling the void left by the manufacturing sector.
ProLogis, the world’s largest industrial real estate investment trust, reaffirmed the stability of the region’s big-box distribution stock when it bought Keystone Property Trust’s 44 million-square-foot portfolio. Keystone’s ream of properties was mostly bulk warehouse/distribution space and ProLogis decided it was important to enhance their own position in key areas where the smaller REIT had the most significant holdings, one of those areas being eastern Pennsylvania.
MIAMI
Miami’s industrial market survived a rollercoaster year that ended on a more upbeat note than it began. During the second half of the year, pent-up demand from tenants brought about a decline in vacancy, net absorption was positive across all space types and average asking rent was on an upward trend.
International trade is back and this is great news for the industrial market. Through mid-year 2004, the volume of exports with Miami’s top 10 foreign trading partners posted a 20% annual gain, while imports were up by 7.4%.
Increased trade means increased demand for warehouse space, and Miami’s location makes it a strategic transatlantic shipment point, particularly to Central and Latin America.
Continued growth in international trade will drive the industrial market, particularly the airport west submarket, which has suffered tremendously from the fall-off in trade.
During 2004, construction began at Beacon Lakes, a project that has a build-out capacity of 6 million square feet. The first building of 206,000 square feet was completed, and a duplicate of that building is scheduled to break ground soon.
This project opens the door for additional development to occur in an area that was off limits to developers before the county extended the development boundary westward. Furthermore, the decision to extend State Road 836 west between Florida’s Turnpike and 137th Avenue will further enhance the area’s appeal. Development hot spots in 2005 are expected to be Medley where Flagler Station will add 360,000 square feet and South Miami-Dade where several warehouse condominiums are under construction.
An unusually active hurricane season brought the issue of insurance to the forefront. While Miami-Dade was spared a direct hit by any of the four storms that came through Florida this year, 2005 could bring an increase in insurance rates as insurers seek to recoup some of the losses sustained in other parts of the state.
While landlords might be willing to absorb small increases, significant ones will likely be passed on to tenants, increasing effective rents.
While leasing was sluggish early in the year, sales activity was brisk, particularly on the investment side. Among the projects that were sold, Principal Financial Group paid $45 million for the Dolphin Commerce Center while TA Associates picked up the 1.7 million-square-foot Pelmad Industrial Park for $82.7 million. The dynamics are in play for the investment sector to remain active in 2005. Interest rates are not expected to rise significantly during the next 12 months, making real estate still attractive for investors.
On the sellers’ side, market values have risen dramatically, boosting their return on investment.
The industrial market will remain stable over the next six to 12 months as it cycles through the recovery phase. As the economies of the U.S. and its Latin American trade partners continue to improve, this will set the stage for sustained growth in 2006.
ST. LOUIS
Oversupply in the warehouse-distribution market, St. Louis’s dominant industrial sector, should see relief ahead as vacancy and rents stabilize and positive net absorption makes a return.
Some analysts say that St. Louis is overbuilt. Overbuilt or not, the market remains active with new development. Larger companies have been increasing production, filling existing vacancies and building new warehouses.
Small and midsize businesses also are becoming active. An economic upswing earlier in the year combined with competitive rents has been driving recent improvements in absorption.
With St. Louis’s large Earth City and West Port business parks filling up, development has shifted to other locales, chief among them the I-270 corridor beyond Earth City in the suburban northwest and the I-255 corridor on the Illinois side of the river.
The latter, Gateway Commerce Center, has attracted a number of major build-to-suit projects including a 1.1 million-square-foot regional distribution center recently completed for Hershey Foods. TriStar Business Communities, developer of the 2,300-acre business park, has undertaken new speculative activity here as well in the form of a 500,000-square-foot warehouse.
To the north of Earth City, TriStar is developing the 200-acre Park 370. And in Robertson near the Lambert Field airport, a 600-acre, $412 million industrial and office park planned for a former residential area has been approved by St. Louis County.
The St. Louis Post-Dispatch described the endeavor as “one of the largest job-creation efforts for St. Louis County in decades.” The creation of 12,000 jobs and an economic impact of $7 billion are anticipated; public funding on the order,$57 million of tax increment financing,paves the way.
The Airport Area Redevelopment Commission has received proposals from major developers including Duke Realty, ProLogis Trust, Summitt, Panattoni Development, and a joint-proposal by locally-based McEagle Development and ClayCorp.
To the south, with space getting tighter in the Fenton area, the 80-acre Green Park Commerce Center is gathering steam with new tenants such as Packaging Concepts Inc. building space.
And at the site of a former manufacturing facility on the southern periphery of downtown, several developers, including Sage Properties and Welsh Development, are building new buildings and renovating older ones in the new, 68-acre Broadway Commerce Center.
The outlook for the near term is favorable. Following an extended period of substantial contraction, stabilization in manufacturing employment, a major component in the local economy, bodes well for industrial real estate.
WASHINGTON, D.C
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Industrial and flex buildings are not following the beat of the same drummer in Washington, D.C.
Standard industrial buildings are seeing green but the flex market struggles to maintain forward progress. Driven by the strengthening economy, the Washington, D.C., industrial market is showing modest but steady growth. Overall vacancy is down versus a year ago, though rents for flex buildings fell nearly 10% in 2004.
The Dulles Corridor in Northern Virginia and the Landover, Lanham and Largo submarkets in Maryland have shown the most activity in the region and will continue to be the hotspots in 2005.
