The industrial property vacancy rate in Northeast Ohio is at a historically low 2.5 percent. The cost of capital, as well as a lack of new inventory coming online, has made for a frustrating time for those needing new property to expand their business. Though Northeast Ohio is a market that typically gets a lot of building on spec, no new construction is popping up in the region.
“Developers and landlords went through an extended period during which they couldn’t get materials — it was tough to get glass, tough to get electrical components,” says Eliot Kijewski, SIOR, a principal at Cushman & Wakefield | CRESCO Real Estate. “The lead times on those and similar materials were, and in many cases continue to be, prohibitively long.”
Also, because the cost of capital has increased, as have interest rates, both purchase prices and rents have increased. And since the inventory situation in the short-term is unlikely to improve, it’s created a challenging situation for those in the market for industrial properties.
Smart Business spoke with Kijewski about the state of the industrial real estate market in Northeast Ohio and what buyers and tenants can do to find what they need.
How have interest rates affected the industrial market?
In the past, when the target was a smaller building — something that costs between $500,000 and $1 million — many business owners could write a check to cover the cost because their business was growing. If not, the interest rate environment a few years back made debt far more affordable. But today, especially for landlords or those on the investment side, interest rates have driven up capital costs and made it difficult to get the needed return. And for those who operate a business and are looking to buy a property, the high interest rate makes it difficult to absorb the cost of debt.
There have been instances of industrial buildings listed at values significantly higher than their most recent appraisal that offered their current tenant the opportunity to buy the property and the tenant has turned them down, choosing instead to move. In both situations the buyers are obtaining the building, a tenant is in place but has to vacate. With so few options available in the market, the tenant essentially has no place to go. The demand is there and good buildings are selling for 25 percent more than it had just a couple years ago.
What impact are supply chain issues having on the sector?
Those seeking industrial properties are challenged by the lack of available inventory. The expectation is that those who need a building are increasingly going to buy land and build their building. But getting a loan on land can be difficult because the slow pace of building materials through this supply chain means it’s unclear how fast someone will be able to build. Further, new construction is still expensive and interest rates are now significantly higher.
Building owners and tenants are coping with the challenging real estate environment largely by opting to put additions on their building to get the space they need to grow. That process is also impeded by many of the same factors — cost of capital, material delays — as well as the disruption that building an addition can have on a business.
How can buyers best navigate this situation?
Relief may be coming in the next few years. The vacancy rate is projected to go up as product comes online. And with projections that interest rates are likely to stabilize or drop, as well as the expected normalization of supply chains for needed materials, there is hope that there will be some relief in the sector.
For those looking for industrial real estate, it’s more important than ever to connect with a broker. They’re networked into the region’s property owners and often know when a building will be available. With any available property receiving multiple bids within minutes of hitting the market, having that information as early as possible is critical. ●
INSIGHTS Real Estate is brought to you by Cushman & Wakefield | CRESCO Real Estate.