To the surprise of many, manufacturing is growing in strength in Northeast Ohio, and manufacturing properties are rapidly being bought up.
Terry Coyne, SOIR, CCIM, an executive vice president with Grubb & Ellis, says interest rates are low and demand is real, but the vacancy rates for manufacturing properties haven’t come down to the point where there have been dramatic price increases.
Bearing in mind that, in real estate, industrial property is a leading indicator of economic trends, says Coyne.
“The big-picture story is that manufacturing is leading industrial out of the recession in a hurry,” says Coyne. “It’s a good time to be a landlord and a bad time to become a tenant, which we haven’t said in three or four years.”
Smart Business spoke with Coyne about the office and industrial real estate markets in Northeast Ohio, and the conditions that have put it where it is today.
What’s happening with real estate in Northeast Ohio?
Industrial’s vacancy rate is almost always historically lower than the office vacancy rate. In Ohio, we’ve got many industrial companies, so prospective buyers have more of a base to choose from. There are fewer office properties because we’re not a headquarters-type location for regional offices. Currently, Akron’s industrial vacancy rate is 10.6 percent and office vacancy is 11.9 percent, while Canton’s industrial vacancy rate is 9.5 percent and office is 11.6 percent.
We went into the recession with high vacancy rates and are coming out with vacancy rates that are decreasing at a speed I’ve never seen. We’re down 100 basis points in nine months, which is good for any market in the U.S.
If you have a building that has any manufacturing capabilities, such as a crane, or a lot of power, or that is near railroad tracks, it’s a great time to be an owner. It’s surprising how quickly we’re coming out of the industrial recession.
The market for office properties has mostly stabilized and has turned the corner. There aren’t as many vacancies coming online because the unemployment level has gone down quarter over quarter in our metro area for three quarters in a row, and that’s reflected in absorption in the office market.
We are seeing better rental increases in industrial, better sale prices relatively speaking in industrial and, if things continue, office-type jobs should see a rebound in the next 12 to 18 months.
What’s driving this trend?
Real demand is increasing because manufacturers that have survived the recession are adding capacity or are reshoring and bringing jobs back to the U.S. The increase in transportation and labor costs in China and Asia means that the financial delta between operating there and in the U.S. is not that great. As a result, manufacturers are mitigating their risks, especially in regard to quality and timely delivery, by having goods produced here.
Also, the manufacturing market is very strong because of organic growth and, especially in Akron and Canton, because of oil and gas. The oil and gas market is adding jobs and absorbing industrial buildings, and Canton has become a headquarters for office space for those in the oil and gas market, positively impacting the region.
How is demolition impacting the real estate market?
Scrap prices were high a few years ago up until last summer. When scrap prices are up, demolition increases, but prices have since come down for ferrous metals. As a result, demolition won’t increase again until the price rises above $400 per ton. There are a lot of people combing through our market looking for the next building they can demolish, but a lot of it has been picked over.
Demolition affects the market because it wipes out buildings that are functionally obsolete. Those types of properties tend to attract low-end tenants that don’t generate a lot of income tax for cities or much in real property taxes. So from a big picture, macro perspective, demolition is a nice way to clean things up.
What about repurposing?
The competition to repurposing is demolition. It’s interesting because a lot of those opportunities are gone. And now that users have real demand, they are becoming competitors to redevelopers.
I think you’ll see a little less repurposing because we are a market that likes to own buildings — put a loan on them, build up equity and sell them. In the past three or four years, it’s been hard to get a loan, so it’s been a great time to be a redeveloper buying up properties and leasing them to those who can’t get loans. Now, however, loans are easier to get, demand is real and that will slow down the redevelopment side of the world.
Is now a good time to buy?
Low natural gas prices mean that if you’re a manufacturer, you want to locate here because one of your materials is cheap. Add that to the trend of reshoring and organic growth, and now you have three demand drivers that are real, whereas in the past you only had one.
Is it a macro shift? I hope it is, because then you’re looking at something that’s generational in scope, and if that’s the case, you’d better buy something as fast as possible.
Also working to our advantage is that when people manufacture items in the U.S., they make them in the Midwest. People are coming back, and all those laborers with the necessary skill sets and the infrastructure are here, so if you’re going to bring it back, you’re going to bring it back to where it was made the first time.
Terry Coyne, SOIR, CCIM, is an executive vice-president with Grubb & Ellis. Reach him at (216) 453-3001 or email@example.com.
Insights Real Estate is brought to you by Grubb & Ellis
Inclusion of minority and women-owned companies isn’t just the right thing to do – it’s the smart thing to do to economically benefit the region.
That’s the message from the Northeast Ohio Economic Inclusion Forum Series. The series aims to engage the public, private and nonprofit sectors in creating a targeted, comprehensive economic inclusion action plan for Northeast Ohio.
“A lot of growth in the economy comes from small businesses, and minority small businesses are an important part of that fabric,” says Sandra Pianalto, president and CEO of the Federal Reserve Bank of Cleveland. “It is very important to our economic growth, both from a region and a country, to have every individual, every part of the workforce, fully engaged.”
The March panel for the third phase of the series, “Perspectives from the Private Sector,” discussed the role larger companies can and should play in fostering economic inclusion, and how this benefits their business.
Create a diverse staff to foster innovation
Inclusion begins internally with the hiring of a diverse workforce, says Chris Connor, chairman and CEO of Sherwin Williams. This ensures you can provide relatable service to your customer base.
“We look to hire, recruit, train and develop the leadership of our company from this broad spectrum of different folks so that we can, in fact, emulate and look like our customers,” Connor says.
A diverse staff also fosters innovation and creativity by bringing together diverse perspectives.
“Diversity of ideas is critical to better decision-making,” Pianalto says. “We made it a part of our strategic direction almost 10 years ago to make sure that we had a very diverse and inclusive organization and culture.”
To ensure an inclusive culture, inclusion must be embraced, communicated and incentivized from the top down.
“This is a topic that gets discussed in the boardroom; it’s a goal that I’m measured on by my board,” Connor says. “There are compensation and incentive goals on this topic of inclusion, so it’s on everybody’s hearts and minds. We just made this a business prerogative as opposed to a check-the-box, to-do project.”
How you can help
Although Pianalto says bank lending is on the rise, the current economic state makes it difficult for small companies to gain access to capital. That’s where larger companies can step in to help their client companies.
Paint manufacturing companies commonly support professional painting contractors by selling them the equipment and materials they need on credit. This enables the contractors to begin work, hire others and generate cash flow.
“You’re seeing more businesses step in in a very focused, strategic segment of supporting customers in providing some of that financial quota to get these things going,” Connor says. “We’ve done a lot of that for minorities, and we’ve been richly rewarded by that.”
Larger companies can also ensure smaller companies are able to do business by “unbundling” large projects, breaking it down into smaller pieces so that people have the chance to bid on types of business that they’re capable of handling.
This method was adopted in the building of Cleveland’s Horseshoe Casino, with a point scale used to evaluate potential contractors’ levels of inclusion.
“It takes a little bit more coordination on the front end, but at the back end, the rewards, the mentality, the excitement it creates within the job of people that would have never been afforded this opportunity before is immeasurable,” says Jeff Cohen, CEO and founder of Rock Cos. and vice chairman of the Cleveland Cavaliers and co-visionary of the Ohio Casino Initiative.
While this unbundling can help small companies on a local level, Warren Anderson, president and general manager of Anderson DuBose — the 17th largest African American-owned industrial services company in the U.S. — says this unbundling can hurt growing minority and women-owned companies by making a job too small.
“If you’re a small-to-medium company like mine, a small contract is too small,” he says. “But a national contract with a bundled approach across the country is too large.”
With that in mind, companies can also take another approach to inclusion by giving big contracts to prime contractors that are capable of handling the magnitude and encouraging them to partner with smaller subcontractors for local materials and labor. Cohen says such partnerships added value to potential contractors on the casino project’s inclusion evaluation scale.
Women- and minority-owned firms have an obligation to earn business through top-notch service, says Anderson.
“I compete for contracts based on superior price, service and personnel,” he says. “So to me, in terms of running my business, it’s about being as good as anybody and being attractive … for companies to award contracts to, so I’m included in the bids.”
Successful women and minority-owned firms also have an obligation to help other women- and minority-owned businesses with their growth.
“We encourage those who have been successful to turn around, reach back and lend a helping hand to those who have not been as fortunate,” Cohen says. “You need to provide those opportunities, because in many instances, that’s all it’s about — being given the opportunity to perform.”
For more information:
Watch “Rachel Talton of Synergy says economic inclusion action plan will benefit northeast Ohio”
Watch “Jodi Berg of Vitamix Corp. says inclusion promotes innovation and inspiration”
How to reach: The Northeast Ohio Economic Inclusion Forum Series, http://theciviccommons.com/issues/neo-economic-inclusion