Economic uncertainty has touched all areas of real estate in the past 6 months to a year, and that is certainly true of the industrial sector. Most Southeast markets experienced a lull in new construction and expansions last year that continued into the first part of 2002. But with the United States' recovering economy, many southeastern markets, with companies that have delayed construction starts and expansions since September 11, are taking a step forward in industrial activity.

Tampa Bay

According to Colliers Arnold Commercial Real Estate Services, the Tampa Bay, Florida, industrial market has seen a softening overall, with an increase in vacancy and a decrease in absorption. New construction and rental rates have been flat, with some rental rates declining slightly.

"There is a general reluctance to move forward with speculative development," says Senior Associate Edward Miller. "Tenants aren't expanding. While interest rates may be low, lenders are requiring additional assurances and guarantees, and capital is not as plentiful as it was 2 years ago. People are choosing to do nothing and see if things improve."

Miller also notes that people are using space more efficiently, both on the office side and the distribution side. Technology has permitted putting more people in less space to do more work. Therefore, businesses are leveraging technology in order to keep capital expenses down.

Overall, Tampa is becoming less of a distribution hub and more of a service center hub. Within the Tampa Bay market, there is a generalized trend toward larger centers, higher clear heights and turning inventories more quickly. There is a concentration of large distribution centers along the Interstate 75 Corridor. Communities like Lakeland, Orlando and Davenport are attracting distribution requirements.

One thing that is driving deals in Tampa is investment, according to Miller, with real estate being the preferred vehicle over the stock market. "Overall as a category, real estate investment trusts (REITs) are up 50 percent over the past 6 to 8 months," says Miller. "They provide a steady yield, they operate real estate in many markets and they help mitigate risk for an investor. Consequently, many high net-worth individuals are putting their funds into private investment groups and private investment pools that are going out and seeking opportunistic buys of real estate in this relatively slack real estate market."

The Tampa Bay market has also seen significant subleasing recently. Colliers Arnold recently represented Verizon Wireless (formerly Primeco) in a 48,000-square-foot sublease to H. Lee Moffitt Cancer Research Institute, which is associated with the University of South Florida. The company is also ready to complete a major land transaction on a user-driven distribution facility.

Despite the softening market, the future for Tampa Bay looks bright, says Miller. "Industrial property is a commodity market, and the way you handle a downturn is to discount and move the merchandise," he explains. "Now people have no merchandise, and they are running the risk of losing customers and losing market share if they don't have goods to sell. So the factory orders have gone out, factories have cranked up again and people are going to need a place to put stuff. So I expect absorption to increase."

Chattanooga

Over the past few years, Chattanooga has not had a tremendous amount of industrial expansion or new industry relocating to the area. Why? Chattanooga did not have product to sell or lease; it had a very low vacancy rate; it did not have an abundance of lands owned for manufacturing and warehouse distribution; and it did not, and still does not, have any speculative industrial developers.

But things may be turning around.

"We've had a resurgence of energy in the downtown and central business district on the south side," says David DeVaney, president of NAI Charter Real Estate Corporation. "But with that, the appropriate resources were not allocated to industrial recruiting. We recently hired a new economic recruiter for the Chamber of Commerce, and I think we now have the resources to recruit business."

Specifically, the city and county just purchased 940 acres of the U.S. Army's old ammunition plant. The area, called Enterprise Park South, is now appropriately zoned manufacturing property. It is going to be one of the premier industrial tracts in the Southeast, according to DeVaney. The city and county are putting together a marketing program for the property and will sell it in tracts ranging in size from 5 acres to 500 acres.

Chattanooga is seeing some build-to-suits, says DeVaney, but no speculative development as of yet.

"Chattanooga has had a very strong local and regional industrial base that consists mainly of owner-occupied properties," DeVaney notes. "The new construction we have seen in the manufacturing sector has been the expansion of existing companies that tend to be owner-occupied. Therefore, we do not have the speculative development, but we still have a pretty steady construction of square footage being added to the inventory."

NAI Charter Real Estate has recently been involved in several major transactions. The company sold 200 acres owned by the Dixie Group to Blue Cross Blue Shield of Tennessee, which paid $4.65 million for the property where it plans to put a major office campus.

The company also recently brokered an 86,400-square-foot office/warehouse complex in the Volunteer Industrial Park for John E. Pauley & Associates. Sold for an undisclosed price, the property consists of almost 75,000 square feet of warehouse space and 15,000 square feet of office space.

The economic slowdown has not affected the real estate industry in Chattanooga, according to DeVaney. "The strength of the market is in the strength of the local industry and existing companies, and we're not an overbuilt market," he says. "So we have not experienced much of a slowdown."

In fact, the Chattanooga market has been experiencing a great deal of demand and interest in multiple properties, which it did not have a few months ago.

"Along those lines, I am predicting it to be a buyers' market for the next few months due to the expansions of warehouse and distribution buildings that came on the market a few years ago," DeVaney says. "I think we will absorb most of that in 2002, and in the latter part of 2002 and 2003, I think the build-to-suit and/or speculative development products will begin to come to the forefront."

Nashville

The overall vacancy rate for industrial space in Nashville inched up slightly in the first quarter of 2002, according to Colliers Turley Martin Tucker (CTMT), but the area continues to weather the economic slowdown fairly well due to a strong bulk market and a diverse economy.

The typical deal (between 50,000 and 150,000 square feet) was slow last year, ceasing altogether after September 11 and through the end of the year.

"But we're glad to report that over the past 2 months, that normal 'bread and butter' deal range has picked up dramatically," says Whitfield Hamilton, managing principal of the Nashville office for CTMT.

On the bulk side, the company finished out a number of large bulk transactions at the end of 2001. After a lull in the first quarter, the market has seen the bulk activity pick up significantly across the board, from the smaller users all the way up to the bigger box users. There is currently 1 million square feet of bulk sublease space, which accounts for roughly 70 percent of all sublease space in the entire market.

"I think we will see the continued trend toward companies consolidating their distribution into the logistical corridors set up around interstates 40 and 65," says Hamilton. "The trend toward bigger boxes shutting down smaller facilities and consolidating those facilities into larger bulk distribution facilities is a long-term trend that we do not see changing."

The area is also seeing a continued trend of lower-end manufacturing continuing to move either to Mexico or offshore. Companies then re-work their distribution to fit their new manufacturing arrangements where they are making things off-shore and then assembling components within the Southeast or Central U.S. and distributing those components. "They're setting up their supply chain based on where they're shipping to, not based on where they're manufacturing," notes Hamilton.

The East Market Area continues to get a lot of attention. Local developer Prime Properties announced plans to build a large distribution center on a 223-acre tract on Interstate 840 near Gladeville. And Bridgestone/Firestone has selected a site on Highway 109 near I-840 to build its new 750,000-square-foot distribution center, which could be expanded to 1 million square feet. The $20 million distribution facility will be the company's regional distribution center.

CTMT sold Industrial Investment Package for National Life of Vermont Insurance Company for $13.6 million. Pinchal, an investment firm based in Texas, purchased the assets to take advantage of Nashville's thriving distribution market. The two cross-dock distribution facilities are located in the I-24 Corridor just southeast of Nashville and are leased to Pillsbury and Menlo Logistics.

CTMT also represented both the buyer, Stiles Corporation, and the seller, Perrigo, in the sale of a cross-dock distribution center located in LaVergne, Tennessee. The property, a 518,667-square-foot warehouse on 55 acres, traded for $14.5 million. Stiles Corporation, a national developer from Fort Lauderdale, Florida, will expand the facility to 750,000 square feet.

Over the balance of 2002, Hamilton predicts that the Nashville market will get back on track. " I think we will continue to see our share of the large big box distribution because of our strategic location -- there are three interstates that intersect here -- and the cost savings for some of these companies that relocate in this area. I think we'll continue to see Nashville emerge as a major regional distribution center."

Birmingham

The Birmingham market has experienced a kind of slow, plodding growth, and as a result, occupancies have generally stayed in the high 80 percent or low 90 percent range.

"This area is developed by local developers who have a real sense of timing, understand the demand that's in the market, understand absorption and build space on an as-needed basis," says Mark Byers, vice president of industrial real estate for Eason, Graham & Sandner, a fee real estate services provider that does the bulk of its business in Birmingham.

"Our market is not a real dynamic market," he says. "In some of these larger markets you get real peaks and valleys -- when the economy slows down, the real estate market really tanks."

Birmingham has traditionally been considered a second- or third-tier city with more branch type operations as related to the industrial market. "That continues to be the bulk of our business -- our bread and butter is 10,000- and 15,000-square-foot deals," says Byers. But Birmingham is also gaining recognition as a central distribution center that is well located geographically.

In the past, Birmingham has not had the available space to compete with larger cities for the bulk of industrial tenants. "In Birmingham, there might be two or three choices for space, but if you go to Atlanta, Memphis or Nashville, there is a whole page of opportunities," says Byers. "But if some mid-level manager is willing to make a bold step and move, Birmingham is a defensible location in terms of logistics and geography."

In 2000, Eason, Graham & Sandner bought roughly 1 million square feet of space in a multi-tenant type facility called the Birmingham Food Terminal & Distribution Center. Another notable transaction was the acquisition of approximately 1 million square feet of space that was eventually sold to ProLogis. When ProLogis decided it wanted to get out of the Birmingham market, Eason, Graham & Sandner acquired the project and closed on the $33 million transaction at the end of 2001.

With the slowdown in the economy over the past 2 years, Birmingham didn't have the kind of expansion it has seen in the past. But in the last 6 months, things seem to be improving.

"There are a lot more people looking for space, and there is actually some absorption taking place," notes Byers. He adds that with the success that the central part of Alabama has had in attracting the three auto manufacturers -- Mercedes-Benz, Hyundai Motor Company and Honda -- and the fair amount of activity associated with this success, the future for Birmingham is extremely bright.

Roanoke

The Roanoke Valley is a hotbed of industrial activity, with everything from Virginia Tech, which has a corporate research center that has spun off some very successful startups, to being one of the top locales for the automotive and truck supply industry.

The area has always been one of the big furniture manufacturer locales in the country, but a lot of that industry has headed to countries that can produce it much cheaper, according to Bob Copty of Copty & Company, a commercial and industrial firm in Roanoke.

The region was also very strong in the clothing business, but because it is such a labor-intensive process, that business has moved to markets like Mexico, China and Taiwan.

"So on the negative side, we're seeing a lot of loss of that employee base," Copty says. "We have a good number of facilities that are in the second and third generation use that used to be the sewing and furniture operations. Martinsville, which is a community about 50 miles south of us, in particular, was hit very hard."

Will Davis, state manager at American Electric Power, and formerly in economic development with the State of Virginia, knows all the players in the state.

"As compared to other areas, you're not going to see the mega announcements, but what you are seeing are good solid industrial announcements," says Davis. "We've got several Japanese companies here -- Dynax, Koyo, Yokohama Rubber -- that supply to the automotive market."

Most of the announcements in the Roanoke Valley are relatively new companies that have been so successful in their first announcement that they have already gone into expansions. For example, Maple Leaf Bakery, which located to the area in 1997, just announced a 50,000-square-foot expansion to the tune of about $11 million.

Altec, which manufactures equipment for the utility industry, announced a 187,000-square-foot facility for 150 people -- a $12.5 million investment. And The Roanoke Times just announced a brand new facility; the paper will be located in downtown Roanoke in a 60,000-square-foot facility for $31.6 million.

With so much activity now, what does the future look like for Roanoke?

"I think we're going to see a changing market," says Copty. "The nature of the industrial world in the United States is changing, and we are going to see employment per produced unit continue to decrease and find fewer people in plants. If you have an expensive employment base, and the product can be produced cheaper some other place, it is just a matter of time until that industry is either going to become efficient by automating and reducing employee numbers, or move on. I think we are going to continue to see that happen here and nationally."


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