CORFAC News

Falls Church, VA (November 20, 2012) - An internal survey with 48 North American CORFAC International firms was generated after Porter Realty/CORFAC International in Richmond VA reported that a local developer was building two flex-industrial buildings in its market. We wanted to know if speculative (spec) industrial development was occurring in other markets. The poll results showed that most of the smaller, second-and-third tier metropolitan markets did not have any spec industrial development. However, three of the larger U.S. markets are experiencing spec development and this is also occurring in one of Canada’s healthiest economies – Calgary, Alberta. Following is the reply from four veteran industrial brokers within CORFAC International.

Chicago
Steven H. Tick, SIOR & Principal, Podolsky Northstar CORFAC International
sht@podolsky.com
Tel. 847-444-5716
Cell 847-408-3420

Q: The Chicago market includes Northwest Indiana and Southern Wisconsin and the current vacancy rate is a little more than 10% -- which means there is about 130 million square feet of available industrial product. Why would someone build industrial space on spec, now?

A: One developer is building a one-million-square-foot project on spec and another 604,000 square feet on a speculative basis, while a handful of developers have started smaller projects – 100,000-to-250,000 square feet. The large projects are coming out of the ground because nothing is available in that size. Plus, Chicago has historically been a ‘if you build it they will come’ type of market – with the exception of the recent post-recession period.

Tick added that he and his partner Steve Podolsky are representing a third-party logistics operator that is in the market for 550,000-to-650,000 square feet with 32-foot clear height and the unusual requirement of 450 trailer spots AND 500 car spots (this real estate does not exist in Chicago and probably not anyplace else, Tick said).

Q: What type of trends are you seeing, in terms of occupier requirements for large warehouse and distribution facilities?

A.  Some of the logistics companies we interact with are saying that their clients are shifting to a different distribution method and loading trucks for individual stores, so rather than loading a single truck full of shampoo to be taken to multiple stores and other distribution drop spots, the truck is loaded just for one store. For example, a truck will be sent to Moline, IL with merchandise for that location and another truck could go to Milwaukee with merchandise specific to that location. 

Inland Empire, CA
Walt Chenoweth, SIOR & Executive Vice President, Voit Real Estate Services/CORFAC International 
wchenoweth@voitco.com
Tel. 909 545-8007
Cell 909-753-6103

Q. The Inland Empire is one of the largest distribution hubs in the world, with many buildings more than a half mile in length. How much new industrial space is being built and how much of it on spec?

A. We have somewhere between 5-7 million square feet of space under construction in the Inland Empire market, about 90% of it in buildings that are over 400,000 square feet.  All of it broke ground on a speculative basis and a good portion of it is preleased or sold.

Q. What type of tenants are in the market for the space, and do you think it will all be absorbed in a reasonable period of time? Why?

A. Most of the large blocks of space are being leased or sold to large retailers or consumer products companies (Amazon, Harbor Freight Tools, Ross Stores, Pepsi, HauteLook). Many of these large corporate occupiers select this area because of the lower real estate cost in the Inland Empire and the proximity to the ports of LA and Long Beach.  The Inland Empire is the only market in Southern California where large blocks of Class A warehouse space are available and can still be developed on available land parcels.  Demand and new development seem to be fairly well matched up.  This market absorbed roughly 5 million square feet of new construction over the last year and there is roughly the same amount under construction.  Most of this space was preleased or sold before completion of construction.

Houston
David M Boyd, SIOR, CCIM & Principal, Boyd Commercial/CORFAC International 
dmboyd@boydcommercial.net
Tel. 713-599-3454
Cell 713-412-4186

Q. Spec industrial development is occurring in Houston, too. How much space is coming out of the ground or approved for development?

A. We have a ton of spec in Houston more than most of the other markets in the country; +2 million square feet is under construction and more than half of this is spec. Net absorption has been positive every quarter since the 4th quarter of 2009 – the most recent negative quarter. The overall industrial vacancy rate is sub-7% now but more telling is Class A space at around 4%. Any time the vacancy rate in Class A space is more than 2-3 points below overall vacancy, it means that the demand is sustainable for 18 months or longer. That’s why there is so much industrial development in Houston. On the manufacturing and service side you see local developers building smaller, single-tenant buildings for sale or lease to meet the demand spike created by oil field service companies from shale gas production currently being developed in Texas.

Q. Is this energy related, port related or what?

A. Job growth is the primary reason. There is demand for new manufacturing facilities. Houston’s MSA is 6 million people and predicted to go to 10 million in next 25-30 years. The local consumer market is strong, we have a pro-business and development environment with few if any zoning restrictions, relatively cheap land and the energy markets - both in exploration and production, are booming.

Q. How much of Houston’s industrial activity can be attributed to the Port of Houston?

A. The Port is a strong driver but one of the softer submarkets because of large amounts of new construction there prior to slow down in 2008. That space is just now getting absorbed. Most of the spec going on in Houston is in the north and west submarkets away from the Port where Class A is very tight. REIT's have land positions and cash to build and no loans needed; they are typically adding buildings to existing business parks.

By the way, the Port of Houston is a 25-mile-long complex of diversified public and private facilities. For the last 14 years, the port has ranked first in the United State in foreign waterborne tonnage. The port is also first in U.S. imports – for 20 years in a row, and second in U.S. export tonnage and second in U.S. total tonnage for 20 consecutive years.

Calgary, Canada
Harvey Aronovich, Principal, Target Realty/CORFAC International
harvey@target-realty.com
Phone: (403) 560-2059

Q. Describe a few of the spec industrial projects happening in Calgary:

A. Hopewell Development Corp. recently built a 400,000-square-foot building in Southeast Calgary and are building 160,000 square feet in the Northeast by the airport. Triovest Development Corp. are building 675,000 square feet in the Southeast and WAM Development Corp. are going to ground with a 650,000-square-foot industrial development on the 40 acres they bought almost adjacent to Triovest.  Bentall Development Corp are developing their land north of the airport which encompass three, 250,000-square-foot buildings and the biggest developer of them all is Oxford Development, which has 200 acres just on the other side of the airport and also have built two, 350,000-square-foot spec buildings and plan on more. And this only includes industrial projects WITHIN the City limits! More is going on around the Calgary perimeter. 

Q. So I take it the industrial market in Calgary is pretty healthy?

A. Very much so. Vacancy is less that 5% and year-to-date industrial leasing is near 4.75 million square feet, or about one million square feet more than the first three quarters of 2011.

Q. What is driving all this demand?

A: Stable economy in Calgary, oil & gas sector doing well, cheap financing and lots of it.