The Akron/Canton area has seen a lot of commercial real estate activity recently. The area’s industrial vacancy rate has gone down slightly, from 8.7 percent last year to 8.5 percent this year. While that rate is slightly above the Cleveland market’s 8.2 percent, it is still well below the national average of 9.7 last year and 9.2 percent this quarter. The office vacancy rate sits at 10 percent this year, up from 9.3 percent last year but still below the national rate of 12.1 percent this year.
Some of the biggest news out of the Akron/Canton area includes the expansion of Struktol. The rubber and plastics supplier is expanding its operations in the area and recently leased 97,000 square foot in Stow, in addition to its existing space in that area. Also illustrating industrial growth in the area, The Timken Co. recently moved into 28,000 square feet of additional space to expand its operations.
Smart Business spoke with Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis, about real estate trends in the Akron/Canton markets.
What are the factors behind the changes in the office vacancy rate in Akron/Canton this year?
Office space is typically a lagging indicator and industrial space is a leading indicator. The region is experiencing significant occupancy by new players in the oil and gas industry. Without them, the vacancy rate would rise.
While the vacancy rate for manufacturing has remained flat from the year prior, sizable companies such as Struktol and Timken are expanding.
The increase in the office vacancy rate seems to be correlated with an jump in total square footage in the region, which increased by 268,813 square feet in the second quarter. It therefore seems that the increased vacancy rate could be due to new construction that has not yet been filled, or from companies that have moved into newly constructed buildings and vacated their previous building.
What is the news beyond what the numbers reflect in manufacturing real estate?
A lot of vacancies have been bought up. Getting someone in the large Lockheed Martin building was fortunate, but there are also some emerging trends that are leading to these numbers. First, many manufacturing companies are reshoring, meaning they are moving production from abroad back to the U.S. Second, the oil and gas industry continues to attract business. Third, many existing manufacturing buildings are being razed, which is reducing the inventory and shrinking the market for existing properties. This causes vacancy to go down and rents to increase. Although the industrial numbers appear flat, the market is improving.
In the Akron/Canton market, existing buildings are filling up with tenants. What does that say about commercial construction in the area?
It’s really very hard to get financing for the speculative construction of office buildings. The area will continue to see rents increase and vacancies decline until banks decide they will provide the loans necessary for the construction of speculative office buildings. What will likely happen is that more businesses will begin building to suit themselves. But the interest rates that make this the best case scenario are not there yet, and many companies are hampered by the amount of equity they need to get a loan, which can be near 30 percent.
The area will likely not see a substantial pace of speculative office building construction for another two and a half years. While this might not be good for construction companies, it is good for landlords who will benefit from increased occupancy and the ability to charge more for rent as the market tightens.
How is the Akron/Canton area real estate market faring compared to the nation?
Net absorption rates in the Akron/Canton area in the second quarter were 651,525 square feet for industrial properties and 25,662 square feet of office space. This year, to date, absorption for industrial properties is at 1,447,517 square feet and office properties are at 111,678 square feet.
Conversely, the industrial vacancy rates in the Akron/Canton area have improved slightly, from 8.7 percent this past year to 8.5 percent this year. In comparison, the national vacancy rate was 9.7 this past year and has shrunk to 9.2 percent this quarter.
Looking at office vacancies, the Akron/Canton saw its rate of 9.3 percent last year, grow to 10 percent this year. This opposes the trend that is being experience across the U.S., which had office vacancy rates of 12.5 percent last year that tightened to 12.1 percent this year.
How do you expect the year to finish in both office and manufacturing real estate?
I expect that you will continue to see a decent pace of absorption on the office side, but industrial absorption will slow.
In terms of new construction, we’ve seen industrial slow down and office keep its pace. There haven’t been any sizeable properties shutting down recently and there’s not a lot of unsettled market right now. In that sense, the good news is that the bad news is over. In 2010, we hit bottom and all the negative noise that appeared every day of another building shutting down has stopped.
Getting rid of any dilapidated supply — when it holds more value as a commodity than as an underlying asset — helps underlying asset values. While it can be understood that razing existing buildings might hurt because it increases the price of existing properties, pricing in this area is still extremely low. If you are looking for office space, it’s tough to find a better deal than in the Akron/Canton area.
Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at (216) 453-3001 or firstname.lastname@example.org.
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Industrial site selection involves so much more than just the cost of real estate. Brandon Podolski, partner and industrial sector leader at Plante Moran CRESA, stresses the importance of taking many factors into account before considering a real estate transaction, regardless of whether it involves entering a new state or moving to a neighboring city.
“Too often, when companies are expanding or consolidating locally, they spend 90 percent of the time looking at the lease rate or real estate costs and don’t account for the impact on operations, labor, cost of goods sold, expenses, taxes and supply chain, or investigate all available incentives,” says Podolski. “These are just some of the components we analyze in a national site search, and they also make an impact on a local scale. Whether leasing, buying, or building, this is more than a real estate deal; it is a business decision that requires due diligence and thoughtful analysis. An experienced adviser can identify and evaluate all of your options and develop a real estate strategy that is closely aligned with your business plans and goals.”
Smart Business spoke with Podolski about creating a competitive advantage through an informed and professional approach to site selection.
How should a business approach site selection?
Companies with multistate operations will commonly analyze the cost benefits of prospective locations in terms of labor, logistics, taxes, incentives, utilities, real estate and other location specific factors. Each of these variables can impact the true cost of conducting business at a selected location. Being proactive can make a sizeable difference.
Can you expand on the critical factors of national site selection?
Logistics plays a key role in selecting the best location. When you think logistics, the first thing that comes to mind is transportation; however, that is just one component. Logistics is the planning and execution of efficient and effective flow and storage of all goods, services and related information to meet customer requirements. Analyzing your existing customer and supplier base and how it ties into a location decision and impacts operations, cost and timing can be a prominent factor in where to locate. Businesses should also examine where they procure raw materials in determining the best location for expansion or new investment.
Transportation costs remain an important consideration in location strategy. It’s important to understand freight requirements before deciding on a specific site to ensure necessary access to interstates, rail and airports, as appropriate, as a location many miles from the main interstate is not conducive to an operation heavily reliant on truck shipping. Modeling how these costs will change based on proximity to suppliers, warehouses and customers is an important consideration.
How can taxes and incentives influence decisions?
State tax structures and incentives are one of the primary items in national site selection. Rates for franchise, and real and personal property taxes can differ significantly from location to location. Corporate income tax structures vary greatly, as well, and some cities have an additional payroll or inventory tax. Some states are more willing than others to offer tax abatement programs, sometimes specific to an industry such as advanced or high-tech manufacturing.
It’s important to conduct detailed due diligence to determine what the tax impact will be on your business and leverage any applicable state and local incentive programs. Many states have an economic development staff that can offer creative programs to help make locating in their state more affordable. Having a trusted adviser in your corner, one who is committed to your success, can be very valuable in this regard.
What part do labor costs play?
Labor costs and availability are significant factors in site selection, and they vary widely across the country. A great incentive package does not necessarily mean the best business decision if it leads you to an area where the pool of employees does not match the skill sets your organization needs or its projected growth. Industrial organizations need to look at their requirements for engineers, highly skilled employees and general labor compared with salary rates and availability for each prospective location. Also, if you are a large user of energy or water, compare the cost of utilities across markets. Water rates are significantly higher in certain states and need to be factored in the analysis. Negotiating utility costs is an often-overlooked strategy.
How does this strategy apply to businesses looking to relocate or expand locally?
Understanding the best practices of national site selection allows companies to look at local real estate transactions differently. The more factors about potential sites you arm yourself with, the more information you have to make a smart business decision and gain a competitive advantage. Working with an adviser when you have a new project or are in the quoting stages can give you the time necessary to conduct a thorough analysis of all options.
Comparing variables not specific to the buildings can tell you the true cost of a location beyond the price of real estate. Analyzing local property tax rates and location-specific incentives provides another perspective to a local real estate transaction. Comparing logistics costs and the proximity to customers and suppliers are also key components. While utility rates may not significantly differ in a local transaction, the energy usage and efficiency of facilities can be estimated based on roofing, windows, lighting and HVAC equipment.
The bottom line is that choosing a location based solely on where real estate costs are the lowest can cause other factors to become unaligned. That’s when market knowledge and a disciplined approach to the selection process become critical, even when assessing locations within a small radius.
Brandon M. Podolski, JD, is a partner and industrial sector leader at Plante Moran CRESA. Reach him at (248) 223-3245 or Brandon.Podolski@PlanteMoran.com.