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Published: Monday, 2/25/2013

More local firms jockey for limited space

Older properties being retrofitted for usage

BY JON CHAVEZ
BLADE BUSINESS WRITER
Land is cleared as work in underway to build a Kroger at the former site of an Ed Schmidt auto dealership at the corner of Dussel and Conant in Maumee. Land is cleared as work in underway to build a Kroger at the former site of an Ed Schmidt auto dealership at the corner of Dussel and Conant in Maumee.
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After a four-year slumber, the Toledo area retail, office, and industrial markets made a comeback in 2012 and are poised to continue their revival in 2013, according to new reports by the Reichle Klein Group, a Toledo commercial real estate firm.

But all three of those markets face the same growing dilemma: a lack of available inventory to show prospective clients who finally are starting to grow or expand again.

Because lenders still are reluctant to fund construction projects on a speculative basis, the situation likely will force the area’s commercial real estate agents to either find alternative properties that can be adapted or retrofitted or risk losing prospective tenants to another city.

“One of the things we’ve been discussing is, if we have a big user, what buildings other than office buildings can we retrofit to accommodate a large user?” said Mike Poulos, a senior vice president and office building specialist with Reichle Klein. “That’s the creative, fun part. We’re just looking at things here and there and trying to figure out what we can do.”

In 2012, the vacancy rate for the Toledo office market fell to 16.1 percent from 16.9 percent a year earlier, according to Reichle Klein. The vacancy rate in the retail market fell to 14.2 percent from 14.7 percent, while the vacancy rate in the industrial market dropped to 8.5 percent from 8.7 percent.

In each of the three markets, there was positive net absorption of space at year’s end. That is, the amount of available space that became occupied exceeded the amount that became vacant.

Kurt Pollex, a vice president and retail specialist at Reichle Klein, said that after years of negative absorption in the Toledo retail market owing to years of overbuilt retail space, it was good to see that finally turn around in 2012.

“We’re definitely seeing a pretty significant improvement in the marketplace on the retail side of things,” Mr. Pollex said. “Anchor [store] space vacancy was up slightly, but [strip center] inline space dropped a full percentage point.”

For retail, one of the biggest positive statistics had nothing to do with square feet or vacancy, he said. “There are good signs and good trends, especially if you look at the charts and the reports. But the biggest is the [Toledo area's] unemployment rate dropping to 7.2 percent.”

A low unemployment rate means consumers with jobs and disposable income, something retailers want to see, Mr. Pollex said. “When you have unemployment rates that are in line or better than the national average, that makes it easier for retailers to consider your market for expansion.”

Another significant retail development is that retail construction in 2012 totaled 263,125 square feet — the first time new-store expansion has been over 200,000 square feet since 2007.

“New construction spiked in 2007. People were getting everything approved — stores, strip centers, malls,” Mr. Pollex said. “I’m glad to see new construction come back a little, but the question is, ‘Will that be sustained?’ I’m generally happy when you have consistent construction and not the big spikes because that’s when you get into oversupply.”

New construction begun in 2012 included an Art Van Furniture store and several discount retailers.

A positive trend was the redevelopment of older closed properties. The Art Van store is on the site of a former theater complex in the Spring Meadows Shopping Center. Meanwhile, bulldozers cleared the old cinema complex on Secor Road to make way for a hotel complex, a closed Kmart store on Central Avenue was torn down to make way for a CarMax, and a former car dealership on Conant Street in Maumee is being removed to make room for a Kroger store.

Mr. Pollex said the redevelopment activity is because retailers still tend to cluster around a few prominent retail corridors, and in those areas “there’s only so much new land to develop. So you’ve got to either retrofit what’s there or scrape.”

But “I’m happy about reuse. … It means that older eyesore properties are going to have some new vibrant uses that just helps strengthen each area where that happens,” he said.

In the office market, reuse, retrofitting, and adaptation also are at the forefront because office-building construction is virtually nonexistent, Mr. Poulos said.

If a tenant seeking 30,000 square feet or more is seeking something in the suburbs, they may be out of luck.

Real estate agents are looking at the downtown area in hopes of persuading prospective tenants in need of a lot of space into retrofitting buildings in Toledo’s Warehouse District. “The problem is we don’t have a lot of large spaces available that are 20,000 square feet or more in the suburbs,” Mr. Poulos said.

If a tenant must be in the suburbs, it may have to pay substantially higher lease rates or fund new construction. Overall lease rates for the metro area are $15.16 per square foot.

But among Class A space — newer, more desirable space — the lease rate ranges from a low of $13.88 in the north/east area to a high of $20.48 in the Perrysburg/Northwood area. Class A space is $18.19 downtown, $18.98 in the south/southwest area, and $18.73 in West Toledo/Sylvania.

More critical for those areas is their availability rate.

“Toledo is not an overbuilt suburban market. Columbus has had large blocks of space sitting empty for years that’s still virtually brand new. They can make a deal there that is 30 percent less than we can do here,” Mr. Poulos said. “Everybody is surprised that rates are so high here for new space. They say, ‘You’re a rust-belt city, that can’t be the case.’ But it is.”

The lack of new available office space has become so critical that it could begin costing the area potential tenants, Mr. Poulos said.

“If [a tenant] absolutely has to be here and they don’t want to build a new building or pay new-construction lease rates, they’ll have to be downtown or they won’t come all,” he said. “Six months down the road we will begin to see this occurring.”

In the industrial site market, demand for space has been slow and steady, but it is likely that the vacancy rate could be flat or even increase over the next year.

A rising vacancy rate might suggest the selection of available industrial properties in the Toledo area is growing. But what’s happening, said Lynette Reichle, a vice president and industrial properties specialist with Reichle Klein, is that more properties with obsolete functionality for today’s businesses are becoming available.

“Our availability rate, even though it shows 12 percent, is a little misleading. For Class A space, it’s real thin. I don’t want to say it’s none, but it’s very thin,” she said. “That’s why there’s so many older buildings available. We’re an old manufacturing town and a lot of the older buildings left were built for job-specific operations and that doesn’t lend themselves to new users.”

For example, the Textileather Corp. plant on Twining Street near the Chrysler Group LLC plant has been empty since it closed in 2009. “Very little of it is useful today. That plant will be taken down,” Ms. Reichle said.

Some small industrial buildings, such as tool-and-die shops, are adaptable and have been resold, Ms. Reichle said. “But when I’m looking to place tenants in today’s inventory, I’d like to see some spec construction begin soon.

“Unfortunately, there’s nothing speculative happening. There’s not going to be any done any time soon,” she said. Banks, she said, only want to finance industrial buildings that are 100 percent pre-leased to a tenant. Tenants want a building now and don’t want to wait for one to be built.

“It’s kind of the chicken and the egg or the egg and the chicken thing. Spec construction would be nice, but it’s hard for me to sit here and tell someone else, ‘You write the check and build it,’ ” she said.

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.



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