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Industrial Real Estate Segment Outlook

Frederick Industrial Real Estate Vacancy Rates Outpace U.S. Average

During the past year, industrial warehouse and flex space has become one of the few bright spots in the nation’s real estate market.  According to CoStar Group’s third-quarter industrial review and outlook, the U.S. industrial real estate market has gained back 72% of demand lost during the previous economic downturn, and is on track to be back at its historical peak by the first quarter of 2012.

Nationwide demand for industrial space is being driven primarily by higher retail sales and higher-than-expected growth in the manufacturing sector.

According to CoStar, manufacturing growth is expected to continue even in the face of the melt-down of European credit markets.  Per-employee corporate profits are at historical highs, and U.S. corporations are holding quite a bit of cash.  Also, there is significant pent-up consumer demand for durables such as cars.

The result of all of this good news is that the national average vacancy rate for industrial commercial space seems to be stabilizing at around 10%.

Unfortunately, Frederick County vacancy rates in those segments continue to climb.  Depending the data one uses, that figure is close to 50%, as shown in the above graph using information from the CoStar database.

Frederick based MAI appraiser Terrence “Bud” McPherson believes that when looking at all improved industrial properties in the county, the vacancy factor hovers around 47%.

In speaking with local commercial/industrial appraiser Michael Pugh, he states that after extracting any number of vacant buildings that are in his opinion functionally obsolete or just not leasable, that figure could be as low as 20%.

Functional or not, the fact remains that vacancies are very high in these sectors of the industrial real estate market in central and western Maryland.

Why is the industrial real estate segment in Frederick (and Maryland) under so much more pressure than the country as a whole?

A significant factor is the amount of commercial new-build projects completed (deliveries) in Frederick during 2004-2006, when vacancy rates hovered around 10-15% and the economic forecast was positive.  These projects flooded the market with about 1.5 million square feet of additional warehouse and flex space…just in time for a recession.

Not only have local businesses failed to absorb the new-build space, they have given up leases on over 1 million of pre-existing square footage since 2006.

According to Matt Holbrook, Regional Partner at St. John Properties, Maryland’s business climate plays a part.  “In times when cost is king, taxes and incentives mean much more than in go-go times.  Maryland isn’t as business-friendly as Virginia and other nearby states.  This economy has tenants shrinking in size and moving for cheaper rates, even if that means moving to cheaper districts.”

According to an article in today’s , Virginia has been recognized as the second best place to do business in the nation.

What will it take for Fredericks industrial real estate segment to recover?

A 2003 NAIOP study stated that the average industrial space ran close to 900 square per square feet per employee.

Therefore, using a factor of 900 SF/employee divided into about 3,000,000 of vacant space, the market will need about 3,000 new jobs to be created or transferred from elsewhere to fill these vacancies.

Combine this with the estimated 7,000 plus jobs needed to fill Frederick County”s office vacancies, and it will take around 10,000 new jobs to fill the amount of office and industrial space sitting empty in Frederick.

A bit frightening when one considers that in all of Maryland last year, the state ranked 44th out of 50 in net job growth with the addition of just 1,300 new jobs created in all business sectors, according to a June 2011 report by Maryland economist Anirban Basu.

This of course does not include the very likely high amount of existing occupied space that is under utilized–shadow space.

The combined vacant square footage of these two sectors is causing property owners and developers to offer significant lease concessions.  Figures are so low that such rates do not support new speculative construction in this market, likely stalling commercial development in Frederick for years to come.

“Businesses crave certainty,” said Holbrook.  “They only grow when environs are predictable.  The current local, state, national, and international politics are killing near-term hopes for growth.”

This begs the question of how long will it take to fill all this space?

What do you think? Is it likely that Frederick County will be able to attract nearly 10,000 new jobs to fill its vacant industrial properties over the next 3 to 5 years?

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

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One Response to “ Industrial Real Estate Segment Outlook ”

  1. [...] the MacRo Report has provided an overview of the challenging market for commercial office and warehouse/flex real estate in Frederick [...]

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