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Industrial Guide 2011


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Industrial Guide 2011

  1. 1. Industrial Guide 2011Daily Business Review | May 16, 2011Industrial market shows early signs of recoverySusan Postlewaite KTR Capital had to jump through hoops to snag two new national industrial tenants. But in the end its Seneca Industrial Park in Pembroke Park was filled to 100 percent occupancy — a nice coup in the midst of a soft market barely breaking into single digits in vacancy. "Everyone wanted hh Gregg," said Rick Etner, one of the Cushman & Wakefield brokers who represented KTR in the deal to sign the growing appliance and home- electronics retailer to a three-year, 66,000-square-foot lease for its regional distribution headquarters. Based in Indianapolis, hh Gregg plans to open about a half-dozen stores in South Florida.The company was close to signing at Seneca Park shortly after it launched a search for space at the end of2010, he said, when "the guys [commercial brokers] in West Dade put a full court press on." KTR won over thecompany in February, in part because the property is in an area popular with companies that want access toBroward and Miami-Dade.The lease was valued at $1.6 million.At the same time, Cushman brokers brought in another $1.8 million seven-year lease at Seneca for 23,000square feet for Gemaire Distributors, which distributes cooling systems in many parts of Florida and nationallyand was moving from nearby space."They wanted to be in that ZIP code. They wouldn’t go north or south," Etner said. "They wanted van-highloading; they wanted doors; we gave them seven doors. They didn’t want 21,000 square feet, and 25,000 wastoo much. We literally had to split a bay. "The two high-profile transactions are early signs the South Florida’s industrial market is reviving, but the region’slandlords are still being pressed to hand out concessions to lure tenants or retain others who think they can getbetter deals around the corner."There’s been a lot of musical chairs in the last three years, and there continues to be a lot of tenants movingfrom one space to another space," said Eric Swanson, executive vice president of Flagler Development inMiami-Dade. Industrial Guide 2011 Daily Business Review | May 16, 2011
  2. 2. Still, many brokers say the hh Gregg lease and others like it are positive signs."We think the market is coming back in a big way. One of the indicators I look at is retail. Retail is first to sufferand last to come back, and hh Gregg is a retail client," Etner said.When will the turnaround gain traction?"I’ve seen this a couple times before, and it’s like it happens overnight," said Ed Mitchell, regional senior vicepresident of Duke Realty, which recently completed the $450 million purchase of Premium Commercial Realty’sSouth Florida portfolio, including 51 industrial properties in Palm Beach and Broward counties."The tenant decides they want to be in a certain market, they go in and [discover] they’re kind of getting lockedout. It starts rolling that way, and it starts happening submarket by submarket," Mitchell said.Mitchell said the improvement is starting in southeast Broward, and "in Palm Beach County we are certainlyseeing the northern part of the county tightening up and Boca is definitely changing."He expects leasing rates to rise in certain submarkets. "There’s not a lot of opportunity. We think things aretightening up quickly, and we are seeing rates rising," he said.Along with leasing rates, the demand for quality space is rising, as well, Mitchell said."If you are in Pompano and looking for 50,000 to 60,000 square footage, there are only two or threeopportunities. If you need big space, in all of Palm Beach County there’s none available. A tenant over 70,000square feet will have trouble," he said.Christopher Thompson, an industrial broker at Cushman & Wakefield in West Palm Beach, also seesimprovement."I think we’re probably in another quarter in a tenant’smarket. We’re starting to make the change over. It’sdefinitely not the tenant’s market it was in the third quarterof last year. We’re starting to see that when a tenant looksat multiple spaces and they go back to see one or two, oneof the two is not there anymore."Despite the positive signs, rents in most areas are stillconcession driven, tenant-improvement costs areincreasing, leasing rates are flat and few buildings areselling.Rental rates decreased in all three counties, according tofigures from CoStar. Many Class A industrial landlordscontinued to offer concessions in the first quarter of 2011. Industrial Guide 2011 Daily Business Review | May 16, 2011
  3. 3. Over the past year, tenants took advantage of the weak market to move to more space in large parks, leaving Class B and C properties to suffer. The overall volume of leasing improved in the first quarter, and the region’s vacancy rates dropped in Palm Beach County and Miami-Dade but edged up in Broward. The Miami-Dade industrial market benefits from the role it plays in international trade and its ties to South America.The county’s vacancy rate dropped to 8.5 percent at the end of the first quarter, down from 10 percent a yearago, according to CoStar.Leasing ActivityAMB Property landed Miami-Dade’s largest industrial lease in the first quarter when Aeropost InternationalServices signed a five-year-plus deal for 179,348 square feet at Blue Lagoon Business Park near MiamiInternational Airport. The lease is valued at more than $10 million. Aeropost took over space vacated by DHLGlobal Forwarding.Ed Redlich, vice president of ComReal Miami, predicts that, based on deals in the pipeline, Miami-Dade’svacancy rate will hit 8 percent by the end of the year."Two years ago, in the first quarter of 2009, there were no transactions — not one — over 25,000 square feet. Inthe last six months there have been over 25 transactions over 25,000 square feet."Flagler Development’s Swanson noted cargo volume is increasing at Miami International Airport and the twoseaports, the Port of Miami and Port Everglades in Broward County."All that leads to a more active industrial market. Companies are a little more optimistic. The underlying basis,however, is there is still a lot of people just moving from one place to another place and the vacancy in the ClassB properties has an impact on the rental rates."Broward County’s vacancy rate at the end of the first quarter was at 9.5 percent after peaking at about 10percent in the fourth quarter of 2009, according to CoStar. Brokers say there is a wide variation from submarketto submarket and quality of building."There is a lot of leasing in Class A, but the Class B and C properties are still hurting in occupancy and rentalrates," said Ryan Nee, associate in the Fort Lauderdale office of Marcus & Millichap. "The southeast parks closeto [Port Everglades] have a lot of lower vacancy rates, and any place that has a distribution capacity has higheroccupancy rates as well. The farther north you get, the more vacancy starts to creep in." Industrial Guide 2011 Daily Business Review | May 16, 2011
  4. 4. Palm Beach County’s vacancy rate declined from a high of 12 percent in mid-2009 to 10.1 percent at the end ofthe first quarter of 2011. That’s still well above the 3 percent rate at the end of 2005.The biggest lease in the first quarter of 2011 was JKG Group’s 50,000-square-foot deal at 160 Yamato Road, inBoca Raton."We feel rates have bottomed out and stabilized," Cushman’s Thompson said of the Palm Beach County market."As absorption continues to happen further into 2011 and into 2012 we’ll start to see rate increases as well."Thompson added that "we have started to see the free rent go away or be minimized. Last year, it was onemonth of free rent for every year you signed up, now we’re probably seeing on a five-year deal it’s one or twomonths."Tough Sales OutlookIndustrial property sales continue to be hampered by limited access to financing and fears by cautious corporateexecutives that the economy isn’t fully recovered."Sales velocity has picked up but in terms of pricing we’re stagnant," said Nee of Marcus & Millichap. "Ninetypercent of the sales are still owner-user sales, where someone using the facility comes in and buys it. Financingis pretty loose for owner users, but for investor users, it’s tight."CoStar reported 36 industrial sales in Broward worth $190 million in 2010, up from 26 deals valued at $66 millionin 2009. The largest transactions involved institutional buyers. They included the $54 million sale of the WestonBusiness Center in Weston, which was acquired by RREEF America, the U.S. real estate investmentmanagement arm of Deutsche Bank; and the $31 million sale in August of a 401,650-square-foot building inSawgrass International Corporate Park to Cobalt Industrial REIT II, an affiliate of Irving, Texas-base CobaltCapital Partners.No significant sales have taken place this year.In Miami-Dade, there were 79 sales in 2010 worth a combined $212 million, compared with 54 sales worth $153million in 2009, according to CoStar. The biggest deal this year was the $10.35 million sale of a building at 6100NW 74th Ave., in Miami, to TA Associates Realty in late January.Palm Beach County has shown the most progress since the real estate collapse. The county saw 20 industrialdeals worth $57 million in 2010, compared with seven valued at $13 million a year earlier, according to CoStar.But 2011 has started slowly. The top deal is the $2.65 million sale of the Southern Fresh Foods building inRiviera Beach to Italian Rose Garlic Products in March. Redlich, at ComReal, said the continued buying by biglandlords like Duke Realty is "immensely significant" because it shows institutions are making a commitment toSouth Florida."They are doing their numbers, and they’re betting rates are going to go up. In the last six months they are beingproven right. It may be two, three, four, five years; we’ll have to wait and see," he said. Industrial Guide 2011 Daily Business Review | May 16, 2011