COVER STORY, APRIL 2009

INDUSTRIAL MARKETS SETTLE
Regional activity wanes as warehouse tenants stay put.
Jon Ross

In today’s industrial market, activity is measured relative to the volume of the past few years. Brokers in the Southeast are not sitting on their hands — a few deals are still getting done — but the primary emotion is nostalgia. A few years ago, industrial markets in the region were robust and healthy. Now, a market is considered doing well if it’s stable.

In South Florida, Transwestern’s Walter Byrd draws an immediate line to the past. “Comparatively speaking, I would say the market’s health is very good,” he says. “If you compare it to where South Florida was as a whole 3 years ago, I’d say good.” Back then, the market was experiencing low vacancy rates, strong rental growth and reasonable cap rates. Today, things have changed, but Byrd points out that it could be worse. “The market’s clearly been impacted [by the recession], but not as negatively as other parts of the country.”

In his position, Byrd looks over the industrial activity of Miami-Dade, Broward and Palm Beach counties. He says the three major drivers of the South Florida industrial market are tourism, trade and growth. Since Miami-Dade is heavily entrenched in all three categories, everything that happens in South Florida centers around the area. “When you move north, it’s like moving through the body. Palm Beach County is the end of the foot, the farthest extremity,” he says. “When you look at the slowdown in the economy and you compare it to frostbite, the feet are the ones that feel it first. That’s why we started to see Palm Beach County experience a real slowdown in the industrial market 2 years ago.”

New construction in South Florida is rare, but projects started during the boom years are still delivering. The vacancy rate in the Medley submarket of Miami recently jumped from 8 percent to more than 10 percent because 1 million square feet has been delivered in the past few months. Adding to the increase in the submarket’s vacancy is Hyundai’s decision to move into a new building by the Miami International Airport. “What we’ve historically seen through the last couple of down cycles is that construction continues even into the first signs of the down cycle. When we really get into the down cycle, we have a lot of new product that comes on the market,” he says.

Even with some companies closing up shop and others going through tough times, not many organizations are moving their facilities. Byrd explains that the hassles of relocating outnumber the benefits. “The cost of downsizing, literally moving the operation and going through that disruption, is sometimes outweighed by their ability to go to their landlord and say, ‘Give me a slightly better deal,’” he says. That’s exactly what David McGahren of Colliers Turley Martin Tucker is experiencing in Nashville.

“Companies are pretty content to stay where they are right now. Nobody wants to make a big decision these days,” he says. “If a building works for them functionally and the square footage is what they need, most tenants would prefer not to go through the hassle of making a move.”

Unlike South Florida, however, Nashville has been hit hard by the recession. Industry players are afraid to make any moves because of rampant uncertainty. “Nashville, like most markets today, has experienced the same type of overall slowdown in deal activity,” McGahren says. “A lot of people are in job preservation mode. That has a lot to do with why everything’s locked up — aside from the credit markets.” Industrial vacancy rates are hovering around 10 percent in Nashville, with bulk vacancy rates a few percentage points higher. Industrial occupation has traditionally been higher, but the bump in development that hit in 2007 brought unneeded space to the area. When the slowdown came in early 2008, tenants stopped looking to expand, and the vacancy rate went up.

820,000 square feet has delivered at Beckwith Farms in Mt. Juliet, Tennessee.

Tenants still find Nashville a desirable place to locate. Historically, the city was known as an automotive distribution hang out, and now industries from technology and retail distribution to book publishing call the area home. “It’s a gateway location to the Southeast,” McGahren says. “The chamber of commerce line is you can reach 60 percent of the U.S. population in a day’s drive.” Panattoni Development Company’s Beckwith Farms, located at the intersection of Interstate 40 and Beckwith Road in nearby Mt. Juliet, represents a large project in this static market. Construction is complete on three Class A buildings totaling more than 820,000 square feet. Features in each building include 32-foot ceiling height, T-5 high bay fluorescent lighting and ESFR sprinkler systems. When total build-out is achieved, the park will span 2.33 million square feet.

Even with the Beckwith Development progressing as scheduled, McGahren sees no return to carefree building anytime soon. “For at least the next 8 months, we’ll still see things pretty slow. Until things start to lighten up from a credit standpoint and until there’s a positive outlook for business in general, people are going to play things pretty close to the vest,” he says. “There are a lot of businesses out there that are still doing well. The result is a lot of pent-up demand, so when things do turn around, we’ll see a pretty heavy surge early on.”

Commercial real estate in New Orleans is fueled by the rebuilding activity from Hurricane Katrina. Developers are finishing up everything from multifamily complexes to office space in the region, and the health of the industrial market is strong. “The recovery activity is still going on in New Orleans and Southeast Louisiana. The government has just released several billion dollars for levy construction,” says Daniel Poulin of Sealy & Company. “Developers are just now coming out of the ground with all these huge apartment complexes that were generated by GOZONE incentives.” With  all the activity, Poulin has already renewed nearly half of the leases he has slated for the entire year in a 2 million-square-foot flex portfolio. Rents have increased 5 to 10 percent. “We’re having a lot of Fortune 500 tenants and their brokers call here and whine and ask for a $1 or $2 rent reduction. Their theme is, ‘Well, we’re getting it everywhere else,’” Poulin says. “It’s just not the case here, and we’re resisting that. We’re telling them no.”

Even in a seemingly recession-proof area, developers aren’t clamoring for the opportunity to build in New Orleans. Construction costs and land prices are high, and there simply isn’t enough space for new projects. “It really doesn’t make any sense to build anything new because you can’t achieve market rents,” Poulin says. “You can’t get warehouse rents around $4, which is what you have to do.” The last project Sealy undertook was a 147,000-square-foot warehouse that’s currently 50 percent leased. Federal funding was used for the deal. “We used GOZONE, otherwise the deal would never have made sense; you had a willing and able buyer, and we also used some incentives that were available from Katrina,” he says.

For now, the regional distribution firms and national divisions that populate New Orleans’ industrial parks are content. If the economy keeps heading in a downward spiral, however, rebuilding money will run dry and the area could soon start feeling signs of the recession. “The market’s not great, but it’s stable,” Poulin says. “If the economy doesn’t turn around, we’ll start seeing some of these national tenants pull out.”

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