The Northeast Ohio industrial real estate market continues to tighten, with the vacancy rate at a historically low 3 percent. For tenants on a lease that need to stay in their current building or need to move because their requirements have changed, these conditions leave very few alternatives.
“As recent as five years ago, when the vacancy rate was steady around 8 percent, tenants had options, which gave them some leverage,” says Joseph V. Barna, a principal at Cushman & Wakefield | CRESCO Real Estate. “Today, because of the tight real estate market, tenants are seeing significantly higher rates than they’re accustomed to paying, and yet competition for space is fierce.”
Smart Business spoke with Barna about the challenges tenants, buyers and builders are facing in the Northeast Ohio industrial real estate market.
How has the lease situation changed for industrial tenants?
Leases for industrial properties typically now include annual increases. A five-year deal once meant a flat rate or slight increase over the lease term. Today, it’s more common to see annual increases from 2.5 to 4 percent as well as a much longer-term commitment. That’s because landlords, if they have a vacancy, are maximizing rents and looking for long-term cashflow. They don’t want to do a two- to three-year deal because there are active tenants who will make longer-term commitments with market increases.
The renewal option common in most of these leases now tend to trigger around six to nine months before the end of the term. This is something tenants don’t want to miss, otherwise they’ll be at the mercy of challenging market conditions. Landlord representatives will begin working in advance, anticipating that the tenant will miss their renewal date and current market conditions prevail. It’s not uncommon for those who need space to connect with their broker and commence the search evaluation process one to two years out.
It’s critical for tenants to be proactive in this market. Brokers are working daily to see what’s new on the market and circling back with their clients to review, as there are now multiple prospects exploring the same property and multiple offers will get made. It’s great for owners, but a tough climate for tenants.
What is the situation like for builders and buyers?
Those looking to take a space in a facility built on spec also need to work a minimum of a year ahead of their desired move-in date because some projects are being pre-leased early. Plenty of regional and national developers have bought land these past few years with the idea of putting up spec buildings. But because of the interest rate hikes, continued struggles getting the needed materials and costs accelerating, projects have been pushed back, so fewer of them are being completed, yet space remains in high demand.
Similarly, when industrial buildings become available on the market, multiple offers will follow within a short period of time. The cost of land has also gone up astronomically, with smaller shovel-ready sites difficult to secure. Most new projects are being built southeast or southwest just within the inner ring or outside of Cuyahoga County because there’s not a lot of land within it to build on, which is driving up prices as well. Further, the cost of construction has drastically increased, which can give those looking to build serious sticker shock. There’s also the added hurdle of time. With supply chains just starting to move again, key materials such as steel, precast panels and roofing could take nine to 12 months to procure. What builders used to be able to do in a year might now take two.
It’s a tough market all around for industrial users. It’s driven up costs for many, including those who have little alternative but to stay in the area and find a way to make it work. It’s expected to remain competitive for the foreseeable future, so those that need a space must get started early on finding a solution. ●
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