Commercial-sector warmup

1/18/2004

“If you build it, they will come,” real estate agents assured developers considering putting up new warehouses in metro Toledo - a region that touts itself as a convenient transportation crossroads.

And last year, tenants came to a warehouse owned by United Parcel Service in Maumee.

Finally.

Commercial real estate agents say rental of remaining space in the 126,000-square-foot facility off Holland Road four years after its completion is an indication that the long freeze affecting industrial property in the Toledo area may be nearing an end.

A new report by the commercial real estate firm CB Richard Ellis/Reichle Klein shows that vacancy rates at factories and warehouses in the Toledo area rose slightly during the second half of 2003 compared with the prior year. The area has 93 million square feet of industrial space, and about 11.3 percent is vacant. That rate is up from 8.9 percent at the end of 2002.

But the report strikes an optimistic chord. “The Toledo industrial market seems to have stabilized in the second half of 2003,” the report states. “This is far from saying that the market is in good shape but rather that it has stopped getting worse.”

The report, the first of two surveys on last year s performance of metro Toledo commercial real estate, also looked at office vacancies. Like industrial, area office rentals have suffered in the past three years. But the Reichle Klein report sees reason for optimism there as well.

Vacancies declined to 16.2 percent from 16.7 percent, and slightly more space was rented than was vacated, the firm s report found.

Still, demand for offices remains tepid, said Marty Gallagher, a partner and commercial realty expert at Toledo s Michael Realty, which will publish a similar report in a few weeks on local commercial real estate space.

“It s going to take a little time to recover from where we ve been the last years or two,” he said. “It was a pretty soft year as far as office users were concerned. I sense potentially some increased activity but nothing substantial.”

The Reichle Klein report says the improved market for office space has boosted yearly rents by $1 a square foot per year to $15.26 from $14.25. However, Mr. Gallagher suggested rents may have declined slightly last year.

Most activity involved firms moving from one neighborhood to another rather than office expansions and the arrival of new firms. The latter situation would be a signal of vigor returning to the office market, Mr. Gallagher said.

The vast majority of office space in metro Toledo is divided among downtown, south Toledo and the city s southern suburbs, and west Toledo and Sylvania.

Downtown - home to 45 percent of offices - continued to be plagued by a wave of closures. More space was vacated in the second half of 2003 than was rented: 39,000 square feet more. Although the overall vacancy rate fell slightly to 22.2 percent from 22.5 percent, the only real gains were in low-end Class C space. Top-of-the-line Class A space - new buildings in prominent locations that are well-maintained such as the headquarters of Owens-Illinois Inc. at One Seagate - had an increase in vacancies to 12.8 percent from 11.8 percent in the second half of 2002.

That wasn t the case in other areas with large concentrations of offices. Vacancies in Class A office buildings fell to 13.4 percent from 15.7 percent in the southern end of the metro area and to 10.7 percent from 12.4 percent in the western section.

Maumee s Arrowhead business park, where office vacancies soared to 22 percent in 2001, continued to recover. Vacancies there fell to 10 percent at the end of 2003 from 16 percent the prior year.

Among firms that moved into new digs last year was the fast-growing accounting firm Gilmore, Jasion & Mahler LTD. The firm reduced space in an office at One Seagate downtown, closed another on West Central Avenue in Sylvania Township, and moved into larger quarters in a building in Arrowhead Park.

Kevin Gilmore, who co-founded the firm in 1996, said the move had been under consideration for a number of years as the accountancy s client base among physicians, manufacturers, and others grew and employment increased to 65 from 15. “We did a lot of searching ... but liked this area the best because it s easy to get around and is accessible to the expressway,” Mr. Gilmore explained.

Meanwhile, a number of additional warehouses and manufacturing complexes closed last year, including a drug warehouse operated by AmerisourceBergen Corp. in Toledo, Baron Drawn Steel in Toledo, and a grocery warehouse operated by Spartan Stores Inc.

But real estate agents specializing in industrial properties insist that conditions are improving.

More space was leased than was vacated in the second half, according to Reichle Klein. The difference was a fairly modest 132,000 square feet but that was a big improvement over the first half of the year when tenants vacated nearly 580,000 square feet more space than they leased, the firm reported.

Average rent rates sought by landlords rose slightly to $3.19 a square foot per year from $2.90 at the end of 2002. A number of projects built on speculation were filled after having been empty for several years, real estate agents said.

“Our numbers suggest the overall situation is better,” said Harlan Reichle, of Reichle Klein.

He conceded that owners of vacant factories and warehouses have had “a very difficult two or three years.” “Hopefully,” he said, “we ve hit bottom and will see a gradual turnaround.”

Ron Jurgenson, an industrial real estate specialist at Michael Realty, is optimistic. “We ve seen a lot of activity the last two months,” he said.

On a positive note, a number of tenants who have leased space in the long vacant UPS warehouse and a few other properties built on speculation are from out of town, he said. They include a fiber-glass-door manufacturer that picked Toledo as the site for a distribution center serving Home Depot and other customers.

Mr. Jurgenson said he hopes this is a sign that Toledo s attributes as a distribution hub are beginning to be recognized. Logistics Today, a magazine catering to warehousers, picked the Toledo area last year as the fifth best place in the nation for warehouses, based on factors including proximity of highways and railroads and the availability of workers.

Bob Mack, a commercial real estate agent in the Toledo office of Signature Associates, agreed that leasing activity was lukewarm last year. As he put it: “Office and industrial leasing were slowed.”

Many prospective tenants decided to buy rather than lease because of low interest rates, he noted and added, “We expect that to continue.”

But 2004 is starting out on a promising note, he said.

An auto battery manufacturing firm recently signed a lease for a 12,000-square-foot building in north Toledo that was mostly completed in 1999 but was not finished because a tenant couldn t be found. The firm plans to use the space for an office and a distribution center.

“I ve had a number of deals like that already in 2004,” Mr. Mack said.