A Window Into The Desirable Industrial Landscape

June 10th, 2019

The Greater Cleveland industrial market is a big deal right now. This market segment reached a historically low 5.2% vacancy rate in the first quarter of 2019. As such, demand is high for existing big-box/modern distribution facilities and the construction of new properties.

“Space of this type is at a premium,” says Terry Coyne, vice chairman of Newmark Knight Frank. “The trend has necessitated the need for companies to either build their own or for investors to meet the need by constructing speculative facilities that growing companies — or companies that are establishing a presence in Cleveland for the first time — could make their own.”

Coyne has been involved in the sale or leasing of nearly $2 billion in commercial real estate, having specialized in large, complex industrial deals for the majority of his career. He shares with Crain’s Content Studio — Cleveland his thoughts on the status and outlook of Northeast Ohio’s industrial market.

What parameters make up big-box/modern distribution facilities?

We use the following parameters to categorize a big-box/modern distribution facility: 1) it has at least 32-foot-clear ceiling heights; 2) it was built after 2000; 3) the warehouse portion has Early Suppression Fast Response (ESFR) fire sprinkler systems; and 4) the facility is 50,000 square feet or larger. These facilities also often feature 50-foot-by-50-foot wide-column spacing, a modern truck court and nearby highway access.

Why are these facilities desirable?

These types of facilities increase storage and operational efficiency, leading to tenants getting more value per square foot of leased space. In addition, ESFR fire sprinkler systems are one of the best solutions to protect warehouse inventory from fire and are often required by tenants seeking warehouse space. Overall, big-box/modern distribution facilities are in high demand due to the surge of e-commerce and, in particular, Amazon’s continued expansion. Online retailers are trying to keep up with consumer demand for faster delivery times, which necessitates new supply chain models and customized, build-to-suit warehouse space. Traditional manufacturers are also seeking more modern industrial facilities, placing even heavier demand on big-box buildings and buildable industrial land.

Where have you seen the heaviest industrial leasing and construction activity in Northeast Ohio?

The most prolific industrial submarkets in recent years in terms of both leasing and construction have been the Northeast (which includes Mentor/Lake County, Euclid, North Randall and Warrensville Heights); Southeast (which includes Twinsburg, Bedford Heights, Solon and Macedonia); and Southwest (which includes Strongsville, Brook Park, Berea and Medina). Currently, all six industrial submarkets of Cleveland have facilities under construction — the Southeast leading the pack with about 1.1 million square feet, followed by the Northeast (985,576 square feet) and Southwest (542,000 square feet).

What submarkets are ripe for new inventory or speculative construction, and why?

If we simply analyze vacancy rates, the Southwest is the tightest submarket, at 2.8%, as of the first quarter. Although 500,000 square feet of construction is underway there, and another 500,000 square feet of construction has been proposed or planned, there could still be room for new inventory. The Northwest submarket, on the other hand, is the second-tightest in the market, at 3.5%, but also has the least amount of inventory. Additionally, the Northeast and Southeast are two of the most active industrial submarkets in the region and have been a popular location for speculative construction projects.

What are the current overall industrial market statistics?

As of the first quarter, the Greater Cleveland industrial market achieved a historically low 5.2% vacancy rate. Helping the market reach this milestone was 215,991 square feet of positive absorption in the first quarter, the fourth consecutive quarter of positive absorption.
For comparison, the big-box/modern distribution market is even tighter, with vacancy totaling just 2.3% for facilities boasting 24-foot-clear and above ceiling heights. For facilities with 32-foot-clear ceiling heights and above, the vacancy rate is 0%. Furthermore, select new construction warehouses are seeking rental rates of more than $6 per square foot.

As vacancy dipped, the average overall industrial asking rental rate was similarly affected, as it reached an industrial market record high of $4.74 per square foot in the first quarter.

New and prospective products continue to push rents higher, and the growth of e-commerce has clearly changed the market.

What projects are the highest profile in the area?

Northeast Ohio could soon see another Amazon facility, this time a 695,383-square-foot distribution center on the site of the former Rolling Acres Mall in Akron. Amazon has already established operations in the Northeast submarket in North Randall, as well as Euclid’s Bluestone Business Center II and on the site of the former Euclid Square Mall, which delivered this past quarter; and at a distribution center in the Southeast submarket’s Cornerstone Business Park. If Amazon’s Rolling Acres project comes to fruition, the company will occupy more than 2.5 million square feet of space in Northeast Ohio.

Cornerstone Business Park in Twinsburg has a second spec building under construction, and 96,000 square feet of that 276,000-square-foot facility is pre-leased. Also under construction in this 167-acre industrial park is a 404,000-square-foot O’Reilly Auto Parts distribution center.

New facilities in Mentor recently delivered and measure nearly 320,000 square feet in total. Mentor is also home to an 87-acre land parcel off Heisley Road that has been earmarked for a new industrial park. My team is marketing this property to potential local, regional or national users looking to build facilities from 100,000 to 800,000 square feet. Available land this size is very rare for Mentor and Lake County.

What is the outlook for the Cleveland industrial market big-box/modern distribution facilities?

E-commerce is here to stay, which bodes well for the future growth and occupancy of big-box/distribution facilities and the industrial market as a whole. Industrial in the near future should remain hot, with most of the new construction necessary for the market due to low vacancy rates. In the intermediate future, once all of the new construction delivers, the market should flatten out but still remain competitive. As technology evolves, industrial facilities could still be important, though automation will surely develop further and will disrupt commerce.