Industry trade

Need for speed drives demand for move-in ready buildings

WEST CHESTER, Ohio — Suburban fallout has long eaten away at the bucolic countryside around Cincinnati. Twenty-five years ago, growth was fueled by affordable housing and award-winning schools. But, as the economy has changed, the demands for space have changed.

Part of West Chester, a city about 18 miles north of Cincinnati, is bounded by three interstate highways, making it a coveted logistics hub, and developers have taken note: There’s no Not so long ago, seven acres of farmland were targeted for reallocation by Northpoint Development.

Just 18 months after the project was proposed, the first tenants began moving into the 1.8 million square foot West Chester Trade Center, which had risen on those acres and brought with it medical and light manufacturing. General Electric has opened a 3D printing facility with jobs averaging over $100,000 a year, said Butler County Department of Economic Development director David Fehr.

What makes the West Chester Trade Center remarkable is that it was built on speculation, meaning it was built without a guaranteed tenant. Typically, spec building amenities are sparse, but most have loading docks, ample overhead clearance, and parking lots.

The need for speed is making buildings increasingly attractive to developers and economic officials, who say the trend is accelerating.

“We started to see a big push five years ago, and the people we talk to say it’s just that these companies are growing at such a rate that they won’t have the time or the expertise. to construct a building from scratch,” Mr. Fehr said.

It used to be that a city would open an industrial park with great fanfare, promoting its utilities and roads, and businesses would do the rest. But this process, known as custom building, is too slow for many companies in the increasingly unstable supply chain ecosystem.

It’s not just the big markets that are participating in the custom building boom. Even small towns put their muscles behind such constructions.

In Whiteland, Ind., a town of about 4,400 people, local leaders wooed an Atlanta firm to invest $70 million in the construction of two specific buildings, one 500,000 square feet and the another 1.1 million square feet. The buildings are expected to be completed in 2023 and 2024.

Specific buildings pose risks, such as unstable macroeconomic conditions and acute local conditions, which can dry up demand in the blink of an eye, leaving a municipality and developer holding an empty building.

For now, “it doesn’t look like this party is going to end anytime soon,” said Andrew Hunt, the Vieth director of Marquette University’s Center for Real Estate. It depends on supply and demand, he said. Vacancy rates are so low and so many tenants are looking for space that even in 30 months the building will be full.

“Historically, spec buildings have been risky, but in a market environment like the one we find ourselves in now, where there’s a race to get goods out there faster and to make more stuff, the flexibility of the specification space becomes an asset, not a liability,” Hunt said, adding that industrial space vacancy was less than 5% nationally.

The insatiable appetite for move-in ready buildings has been fueled by e-commerce, which has grown significantly during the pandemic as many manufacturers brought overseas facilities back to the United States, he said. .

A significant risk, however, is inflation. Construction and labor costs are rising, forcing developers to raise rents. Hunt estimates that it costs developers 40% more to build an average spec warehouse this year than it did last.

But some industry watchers say inflation and supply chain issues are contributing to the spec-building boom rather than hindering it.

Developers like to build as soon as they can because waiting can drive up costs, said Gary Roden, vice president of design-build business development at TDIndustries, a Dallas construction company. “Texas has a great influx of business, which is helping demand and pushing lenders to be more optimistic,” he said.

Most spec buildings are flexible. Often around 5% of the space is for offices, Hunt said, but that can vary by market.

In Austin, Texas, for example, up to 10% of a specific building is often office space, while San Antonio calls for less.

“The spec building uses in San Antonio are more distribution-based,” said Joe Iannacone, senior vice president of Titan Development, which is in the midst of a two-million-square-foot spec development in Hutto, in Texas, just outside of Austin. .

The thought of recession is still in the back of his mind, Mr. Iannacone said, but market conditions, particularly in the Southwest, show no signs of changing.

“All of these vendors need space, and there’s no space right now,” he said. Titan generally chooses sites in smaller municipalities where zoning restrictions are generally less onerous.

NorthPoint Development, one of the nation’s largest players in spec development, has a 40 million square foot project underway in Joliet, Illinois. Residents objected to the size, but City Council gave NorthPoint the go-ahead this spring.

The market will support development, said Brent Miles, NorthPoint’s chief marketing officer. “There’s a huge demand, and I don’t see it ending,” he said. Seventy-five percent of NorthPoint’s leases are under speculative development.

He added that most developers base their decisions on three criteria: location, infrastructure and labor availability.

Special buildings are more than shell warehouses. Multi-storey buildings are becoming more common, mainly in coastal areas where land is scarce. Some manufacturers are even taking risks on specialized specifications, hoping to capitalize on growing demand in the biomedical sector.

“The need for lab space far exceeds the current supply,” said Scott Cooper, vice president and division manager at Brasfield & Gorrie, one of the largest privately held construction companies in the United States. “This has led many of our clients to develop bespoke laboratory buildings to give their tenants a boost in their race to be first to market.”

Biomedical customers are confident they’ll be able to lease the space as quickly as it can be built, Cooper said, adding that demand for lab space in North Carolina’s Research Triangle region, for example , increased.

“With vacancy rates as low as they are, it would take a significant decrease in demand for life sciences space to move away from speculative construction in these key markets,” he said. he declares.