The Driving Forces Behind Industrial New Construction

September 21th, 2019

The pipeline of new construction industrial projects in the Cleveland market continues to be robust. Amazon further expanded its presence in Northeast Ohio over the past several months, including completing the build out on its 650,000-square-foot distribution center at the former Euclid Square Mall. Meanwhile, a 276,000-square-foot speculative warehouse facility at CornerStone Business Park in Twinsburg also recently entered the market, part of a surge of speculative industrial development that indicates developer confidence in the health of the Northeast Ohio industrial market.

Development of new industrial buildings has largely been driven by the demand for modern distribution space featuring ample trailer docks, 32-foot clear ceiling heights and Early Suppression, Fast Response (ESFR) sprinkler systems. There is very little space available in the market meeting these needs. The lack of supply has even led to some industrial users retrofitting former big-box retail stores into industrial warehouse spaces.

Seeking to satisfy this unmet demand, more than 1 million square feet of industrial space delivered in the second quarter of 2019, with more than 2 million more square feet of industrial product currently under construction or proposed. The delivery of speculative space is reflected in the industrial market’s vacancy rate, which increased slightly from the first quarter to the second quarter, due to new supply hitting the market. The industrial market posted its fifth consecutive quarter of positive absorption.

“There is a wave of new construction the market has not seen,” says Terry Coyne, vice chairman of Newmark Knight Frank.

Coyne has been involved in the sale or leasing of nearly $2 billion in commercial real estate and specializes in large, complex industrial deals. He offers his perspective on the driving forces behind the spate of industrial new construction.

The 1.09 million square feet of new industrial space more than triples the amount of space that delivered in the second quarter a year ago. What is driving speculative development and industrial new construction?

E-commerce and other warehouse/distribution-related industries have been the primary forces behind speculative development and new construction. In fact, Amazon alone now occupies nearly 2 million square feet of space in the Cleveland industrial market. The Akron/Canton market will also see a projected 700,000-square-foot Amazon facility in the near future, as plans were recently announced regarding a fulfillment center on the site of the former Rolling Acres Mall. These industries require facilities with high ceilings and other very specific build-outs that traditionally have been in short supply in our market. Therefore, demand has been strong, and the only way to quench demand for something in short supply is to build new.

What does this trend suggest?

Ultimately, the construction of new industrial buildings in the Cleveland market is making the region more competitive at the national and international level as a place to do business. These modern buildings increase operational efficiencies, helping companies do more with less total square footage and to reduce costs. The increase in speculative construction will provide a new supply of modern building stock that will help the Cleveland market retain and attract businesses.

In which markets are you seeing the most demand for new space?

In recent years, the Southeast and Northeast submarkets have drawn the most demand for industrial space, reflected in the amounts of new construction and speculative development, and that remains the case today.

The Northeast includes suburbs with strong industrial sectors such as Mentor, Euclid, Willoughby and Warrensville Heights. The Southeast has the second-most inventory in the market behind Downtown and includes the vibrant industrial hubs of Twinsburg, Bedford Heights, Solon and Streetsboro. What is exciting, however, are the pioneering speculative projects taking place in less-heralded markets, such as Weston’s project at the former Midland Steel site on the west side of Cleveland, expanding options for companies in terms of not only building quality, but also location.

Which markets are commanding the highest rental rates, and why?

The Northeast, at $6 per square foot and Southeast, at $5.62 per square foot, submarkets are currently at the top end of asking rental rates for overall industrial assets. These two submarkets have been among the hottest industrial areas in recent years due to proximity to highways, developable land and communities that are supportive of industry. E-commerce and other distribution-related companies have set up shop in these communities primarily through new construction. These factors have contributed to higher rental rates.

What are your expectations in terms of industrial new construction over the next year?

A number of proposed industrial projects were announced this summer, indicating that the market has no plans of slowing down. New construction in the Cleveland market, as a percentage of total market size, has lagged behind the pace of construction at the national level, so there is still some catching up to do compared to other markets. As such, we expect construction of new industrial buildings to continue at a similar pace over the next year.

What factors will influence the health and stability of Northeast Ohio’s industrial market?

Worries over tariffs and talk of a potential recession could be a factor as to the volume of new projects we’ll see, but the underlying demand is there either way.