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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Over the past 35 years, Akron has successfully transformed itself from the rubber capital of the world into a diversified business climate that supports more than 600 metalworking, electronics, machining, advanced materials (polymers) and biomedical technology companies. In the past six years specifically, the city has devoted a major economic development effort and significant private capital investment towards attracting companies from this last area.
The most recent investment came in 2011, when a new vehicle was created to further attract and create new biomedical company investment in Akron. Akron Bioinvestments Funds LLC was created by the city’s Akron Development Corp. and was funded by private organizations including Medical Mutual, First Energy, Cascade Capital Corp. and Northeast Ohio Medical University. It is a $1.5 million loan fund aimed at providing financial support for the commercialization of high-potential biomedical early-stage companies that are close to market entry.
There are two components of the fund. First, $1.25 million will be dedicated to the Rapid Commercialization Loan Fund, which will include loans in the $100,000 to $250,000 range that are approved based on the merit of the applicant’s business plan and feature low interest rates and flexible repayment schedules. In addition, $250,000 will be dedicated to the Product Development Fund, where grants of $25,000 are awarded based on proof of product concept, market assessment and business plan development.
A major goal of the initiative is quick turnaround time on all funding requests reviewed. This new availability of funding is expected to draw both national and international interest from companies in the biomedical field to Akron in coming years.
In the Akron/Canton real estate market, what’s old is new again. Many companies have taken a chance on a redeveloped older building and turned bad news into a great opportunity.
“When Lockheed Martin decided to increase efficiency by selling its building in Akron and leasing back a smaller portion for its operations, it left a big hole,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis. “But that opened up space for other companies, and there are as many jobs in that building now as there were when Lockheed was the sole tenant.”
Other examples are everywhere. Canal Place is a 12-building complex in downtown Akron that used to be headquarters for The B.F. Goodrich Company. These buildings, originally built in the early 1900s, have been thoroughly updated and now house seven communications companies and three computer software firms. More people work there today than when the former tenant was at its peak.
When Rubbermaid left its facility in Canton, two Northeast Ohio companies filled the building right away.
Smart Business spoke with Coyne about how to take advantage of redevelopment and what to watch for when considering an older building.
How can you take advantage of this?
If you are thinking about moving, these buildings are a great, inexpensive alternative to new construction. The people doing the redevelopment are bringing a product that is excellent quality and fantastic value. So the next time you hear that a company like Lockheed Martin is doing a sale/leaseback and opening up vacancy, it may not be great news in the short term, but it could provide inexpensive space for the next guy in. Pay attention to bad news because it really might be good news from a real estate perspective.
Why should companies consider buying or leasing space in a redeveloped building?
You wouldn’t build these buildings today, because they have amenities that are specific to a manufacturing world that has passed us by for competitive reasons, and because of today’s focus on efficiency.
These buildings have cranes that are hard to come by, floors that are thicker than would be built today, and power distributed throughout in a way that FirstEnergy wouldn’t be too eager to do. These are amenities that — from a replacement perspective — would destroy your budget. But rather than being scrapped, people are taking the risk on redeveloping them.
As a result, they are giving great rates with plenty of amenities and tons of outdoor parking. It’s a built-in infrastructure that supports a lot more than you would ever need at a price you could never touch.
What concerns should potential tenants have before moving forward with this type of project?
Because of the age of the buildings, you need to be more diligent at the beginning. Try to shift the burden of physical maintenance — building, wall, structure, power, anything not specific to your operation —to your landlord, who is the expert in that business. Sometimes the landlord will ask you to maintain part of a building, and with these older ones I wouldn’t take that risk. The reason why they offer some amenities is because it would be very expensive to replace them. If the landlord asks you to maintain a big-ticket item that you wouldn’t normally see, like a transformer, say no. It could cost you in the tens of thousands of dollars to replace.
Also, a new building will have higher ceiling heights and bigger column widths which allow you to store products more efficiently. Many older buildings have lower ceilings and tighter columns. So you’ll be paying less, but you might need more square feet. If you are a manufacturing company that is not worried about ceiling height, then it’s no problem. However, if you are a distribution company, you need to figure out your cubic space requirement. This isn’t just floor space, but how high you can stack products, which is important if you are looking at converting old manufacturing buildings to distribution buildings.
Another issue to consider is the rate. Don’t just say, ‘Well for $1 per square foot, I can buy as much as I want.’ Be careful that you don’t get lulled into just looking at the lease rate and buying three times what you need. If you do it right, it should be a great deal, but these are questions you have to ask yourself before moving forward.
What about environmental issues with older buildings?
Whether you are buying or leasing, you should be much more aware of environmental issues. A lot of these buildings will have toxic substances like PCBs (polychlorinated biphenyls) in their transformers. That, along with asbestos, is a common issue you will see in old manufacturing buildings that you would never see in a greenfield development. So you want to be much more aware of the environmental issues, but don’t be afraid of them. You have to have your eyes open. These are manageable issues; they just are issues you have to deal with up front.
If a building has an environmental issue, it’s not the end of the world. It could be an opportunity to make money as long as you get the right environmental consultant to manage it. So often the average guy looks at it and says, ‘No way, I won’t even consider it.’ That’s not smart. There are experts in the environmental field who can help you manage around it and as a result, you can get a good deal. Don’t just run away; you could be running away from a good opportunity.
Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at email@example.com or (216) 453-3001.