MIDWEST
In Chicago, the first half of 1999 was one of the slowest first halves in recent memory. Lease, sale and build-to-suit activity was down more than 50% from 1998. The slowdown in activity was attributable to the lack of product for purchase, the lack of labor to support operations in some markets and the restrictions of capital that carried over into 1999. Activity picked up in the second half of the year, in part due to some significant transactions in the I-80 and I-55 market areas. The lack of prime in-fill sites, and the increasing cost of land in outlying counties continued to push relocation and development decisions outside of more typical industrial boundaries. Southern areas that are now considered part of the mix include Monee, Mokena, Joliet and University Park. McHenry County, to the north and west, and areas in Wisconsin now are accepted northwest boundaries.
Cincinnati’s industrial market continued very strong, with shrinking vacancies in Northern Kentucky where there is a shortage of industrial land to develop. The Greater Cincinnati market is characterized as extremely strong, with a 5% vacancy overall.
For the third consecutive year, Greater Cleveland’s industrial market defied the prophets of doom and gloom. What was predicted to be a year marked by an abundance of vacant space resulting from a series of mergers and acquisitions, instead turned out to be another 12 months of limited vacancy and healthy demand. Although activity was not as brisk as it had been in the recent past, it was enough to ensure that the majority of the space brought to market was absorbed quickly. Lease rates mirrored demand and stabilized, ending five years of steadily climbing prices. The popularity of new construction coupled with the dwindling supply of vacant land led to higher land costs, but did not slow the building boom. While speculative flex projects were limited, build-to-suits popped up throughout the region, contributing to the overall health of the market.
In Des Moines, speculative industrial activity was minimal in 1999, largely a result of continuing vacancies in new bulk warehouse product. The exception was the northwest suburb of Urbandale, where local developers have 200,000 square feet of high-cube warehouse space nearing completion at Crossroads Business Park and 90,000 square feet of “retail storefront” bulk warehouse space just north of Crossroads at Meredith West Business Park. The northeastern quadrant of Des Moines and northern suburb of Ankeny, however, experienced diminished activity, with only two new speculative bulk warehouse projects, of 60,000 square feet and 70,000 square feet, coming on line. Meanwhile United Parcel Services broke ground on its new $43 million 250,000-square-foot distribution center at the Des Moines Airport.
The Metropolitan Detroit Industrial market continues to experience strong activity with several new developments coming on-line. These projects include Pinnacle Aeropark, Eureka International Corporate Park and Metro World Centre among others. The demand for R & D;/flex space also has increased as the automotive companies continue to outsource technical services. West Michigan earned national recognition in 1999 for continued growth in its manufacturing sector and employment base. One example: Site Selection magazine ranked the region 10th in the nation in terms of the number of new manufacturing plants being built. West Michigan’s reputation as an industrial market was bolstered by the construction of large warehouse space, especially in strategic areas near interchanges and the renaissance zones. 1999 also saw a continuation in the development of owner-occupied facilities, primarily in the southern quadrants of Grand Rapids. In addition, industrial expansion has been active along the lakeshore, particularly in the Holland/Zeeland area.
Approximately 2.6 million square feet of industrial space was added to the Kansas City market in 1999, down from a decade high of 4.3 million square feet in 1998. Of the 2.6 million square feet of new industrial product, 1.4 million was developed on a speculative basis. The sharp decline in total square footage developed in 1999 can be attributed directly to several large user build-to-suit transactions completed in 1998. While the overall square footage constructed in 1999 was down in comparison to 1998, the flow of speculative construction actually increased from 925,000 square feet in 1998. Since January 1998, the 2.3 million square feet of speculative space developed in the metropolitan area has seen leasing commitments for 1.1 million square feet, a 48% absorption. Investment sale activity in 1999 was highlighted by the sale of Prentiss Properties’ local portfolio of 1.6 million square feet to TA Realty Advisors for a reported $59 million.
In 1999, industrial activity within the five-county Omaha MSA reflected the current growth phase of this marketplace, with the focal point of large-parcel development shifting to Sarpy County. Development activity has been extraordinarily robust along the I-80 Corridor. A significant number of jobs have been created and will be filled upon completion of several sizable projects, including a 350,000-square-foot Caterpillar Claas manufacturing facility. Meanwhile, in the Omaha Metro-Douglas County area, development of smaller sites (requiring tracts of 5 acres to 20 acres) continued at a respectable pace. In the northwest submarket along I-680, development continued steadily, as did in-fill of sites in central-city locations. Mixed-use projects and smaller flex product comprised most of this West/Central metro activity.
In St. Louis, tenants demanded new space in 1999 and developers responded with even more new construction. As 1999 was nearing a close, more than 2 million square feet of bulk, office/warehouse and service-center space had been completed. Another 2.5 million square feet remained under construction and more than 2.3 million square feet was proposed. The overall market remained tight, with vacancy at just more than 5%. Leasing activity was brisk, and net absorption escalated during the last half of the year with an annual total of more than 1.3 million square feet in St. Louis and St. Charles Counties. Most of the leasing activity occurred during the first half of the year and the pace slowed in the latter part of 1999. TriStar, Duke-Weeks, ProLogis and Balke Brown are the current hot developers.
NORTHEAST
In the fourth quarter, the Boston industrial market had 1.8 million square feet of net absorption, with 1.1 million square feet in warehouse and 0.5 million in R & D.; The mild fall weather extended the construction period and many buildings scheduled for delivery in 2000 came in ahead of schedule. The strong economy continued to fuel leasing activity, and several large blocks of space expected to come onto the market never materialized. Construction of speculative warehouse facilities was up, which is good news for a market that has a short supply of modern distribution space.
With Long Island repositioning itself into a tech community, demand for space will continue to be high. Rental rates will escalate and build-to-suit construction will increase. Developers are beginning new speculative projects to meet the needs and rapid growth of this sector.
In New Jersey, a steadily expanding economy and an unemployment rate of less than 5% have been among the major factors driving the state’s industrial market. By the end of 1999, the standard industrial availability rate had fallen to less than 4%, with more than 8 million square feet being absorbed in the past year. Expansions by warehousers and logistics firms have created shortages of space, especially in Middlesex County, where approximately 3 million square feet has been added to the standard industrial inventory, yet the availability rate has declined to 3%.
In Philadelphia, Keystone Opportunity Zones, the state issued tax-exempt redevelopment locations, have been a great success, with 200 of the 450 acres in Philadelphia County being slated for development. Non-competitive industrial properties in the Greater Philadelphia market continue to be converted to office use.
Fueled by a healthy economy, the Pittsburgh region witnessed one of the strongest industrial markets in decades. Class A product for lease or purchase was scarce, in contrast with the abundance of available product that is functionally obsolete. Rental rates and sales prices, which started to climb in 1997, continued to move upward as demand outpaced supply. The I-79 corridor, west of Pittsburgh, continued to be the most active market area, followed by the I-70/I-76 corridor in Westmoreland County. Growth-oriented companies were forced to relocate to other submarkets, renovate existing buildings, or pursue build-to-suit arrangements in order to meet space requirements. Local developers remained conservative with respect to new speculative construction. At many locations, development was hindered by a lack of transportation and utility infrastructure, and delayed by zoning and regulatory hurdles. As a result, demand remained strong for high quality, development-ready land for build-to-suit opportunities, particularly in the light industrial and warehouse/distribution sectors. Pennsylvania designated 12 tax-free Keystone Opportunity Zones to help jump-start development in distressed areas. Economic development agencies were active in revitalizing brownfield sites across the region and were successful in bringing product to market.
In Washington, D.C., net absorption blew away expectations, with a positive 1.5 million square feet absorbed during the fourth quarter (more than doubling the absorption seen during the third quarter). Eighty percent of net absorption was in the warehouse/distribution segment. There are several factors influencing this absorption spike and corresponding drop in vacancy rate, including the arrival of newcomers to the market (for example, WebVan and The Room Store), the expansion of existing firms and the delivery of eight new buildings, almost entirely pre-leased and mostly located in Virginia’s Loudoun County. The beginnings of a possible solution to the problem of vacant, functionally obsolete buildings could be seen with the arrival of WebVan, the online grocer, and its 350,000-square-foot lease of a 1960s warehouse for redevelopment into a high-tech distribution center, and Professional Records Storage’s 440,000-square-foot lease of a 1950s-era warehouse and subsequent demolition of 520,000 square feet of outdated warehouse space on the same property. Flex buildings continued to perform well, especially in Loudoun County, which saw the delivery of new facilities for Verio Inc, IntelX, and an owner-built facility for Giesecke & Devrient, a German security paper and ID/credit/security card manufacturing company. Average asking rental rates actually dropped slightly, as some of the more desirable and expensive space was leased up, and competition among owners on approved development sites heated up.
SOUTHEAST
In Atlanta, with the fourth quarter’s delivery of nearly 4.4 million square feet of space and few new starts, construction levels were cut in half, dropping from 6 million square feet to 3 million square feet in a three-month period. The Northeast submarket claims 40% of the space under construction, followed by South Atlanta with 25%. Absorption remained strong, dropping the vacancy rate from 11.0% to 9.2% and ending the year with net absorption of 14.3 million square feet.
The Broward/Palm Beach, Fla., industrial market continues to enjoy healthy vacancy rates. Central Broward holds the largest vacancy, 10%, while South Broward boasts the lowest vacancy rate, 2%. Major industrial projects with planned completions during 2000 include Miramar Centre, Park Central, Seneca, Miramar Park of Commerce and CenterPort.
As of June 1, 1999, the Mecklenburg County, N.C., area consisted of more than 28 million square feet of multi-tenant warehouse and flex space. Although the southwestern and northern areas remain the most active submarkets, each industrial sector experienced strong growth and absorption activity. Record warehouse completions for 1999 constituted the strength of Charlotte’s industrial market; however, the much smaller flex market also saw significant growth in development activity. Led by a more than 5% drop in the northern area, the citywide vacancy rates hit a low of 10.8% in July of 1999. Record speculative construction caused slight jumps in the flex vacancy rates in some submarkets; however, a continued influx of new business activity kept rates at a consistent low. Charlotte’s 1999 warehouse absorption of more than 1.5 million square feet will easily surpass the 10-year average of 915,000 square feet, and the same seems true for the growing flex market.
In Greenville-Spartanburg, N.C., new product totaled almost 2 million square feet in 1999, divided evenly among Greenville and Spartanburg. In addition to new buildings, space became available in several older properties, such as Baby Superstore at 350,000 square feet, and Church & Dwight with a total of 106,000 square feet. Speculative construction continued in 1999, with the addition of 125,000 square feet at Hillside Park in Duncan, along with several buildings by developers Walt Brashier and Johnson Development Associates. The 1999 vacancy rate for standard industrial space was estimated to be up slightly, to 9%. For flex space, the vacancy rate declined from 15% in 1998 to 13.6%.
Nashville had lots of activity in 1999, with users absorbing both new and old product. Nashville now has more national tenants absorbing warehouse/distribution products. Historically, Nashville has not always had big boxes, and as a result was bypassed for these expansions. Today, Nashville has emerged as a major distribution hub, recently ranked fifth nationally by Business Facilities magazine as a growth city in the logistics industry. A large manufacturing employment base, infrastructure, and access to more than 50% of the U.S. population within 650 miles, continue to enhance Nashville’s attractiveness as a national industrial hub.
In Orlando, new construction will soften a bit in 2000 as brokers look to fill the surplus of space, especially sublease space. Rental-rate increases will face resistance as long as new development continues. It may not exactly be Silicon Valley, but Central Florida rapidly is becoming one of the high-tech hotbeds of the East Coast and e-commerce companies will emerge as a growth segment in the industrial arena. According to a study released by the University of South Florida, two new information technology companies are being formed every day in the St. Petersburg-to-Orlando region known as the Florida high-tech industry. This sudden surge in high-tech employment is placing a premium on the development and construction of high-tech facilities.
Richmond’s industrial market exhibited general strength, but there was some slowing. Strength came from general industrial design-build/build-to-suits and land sales to users and developers. Slowing occurred in distribution development and R & D;/flex leasing. Vacancy was higher although most is in functionally inferior buildings. Modern freestanding buildings of 10,000 square feet to 50,000 square feet are in short supply and high demand. Most of the growth for the year was by expansion of existing companies, but indications at year-end were that new companies will add strength to the market soon.
