Industrial real estate recovering

The industrial real estate market continues to improve as a strengthening petrochemical industry fills empty space following the pullback after the financial crisis and recession.

Local brokers note the vacancy rate is still high and tenants have the upper hand in negotiations, but there has been an increase in activity during the last year.

“It’s not gangbusters, but things have picked up somewhat,” said Scot Guidry, of Mike Falgoust & Co. Commercial Real Estate.

Guidry noted the market’s absorption rate was down in 2010 but came back up last year, pushing the vacancy rate closer to the significant 10 percent line. Anything above 10 percent is considered high, but it had come down from 15 percent in 2010 to 14 percent last year, according to an industrial report featured at this year’s Real Estate Trends seminar in April.

But Brent Garrett, of Beau Box Commercial Real Estate, said progress over the last six months has brightened the picture even more.

“I’ve seen more positive absorption through the first half of 2012 so the vacancy rate is better than it was in the trends report,” he said, estimating the rate might be down to 12 percent now, about where it was in about 2004.

Guidry said most of the growth is to the east, into Ascension and St. James; less so to the north and Livingston.

Garrett said distribution companies are making up much of the recent action.

“Baton Rouge is emerging as a regional distribution market,” he said. “The majority of our absorption has been distribution companies and that’s a trend we’ll continue to see.

“In Westport alone in the last six months, we’ve had four distribution companies absorb roughly 300,000 square feet of inventory,” he said, referring to Graham Packaging, Carrier, Velocity Express and Nsoro.

Garrett said the transportation infrastructure — the river, the interstate system — has been recognized more by these national distribution companies.”

Guidry said mergers and acquisitions continue to play a role in the market and are part of a broader trend of companies consolidating regionally, moving out of small spaces and into larger ones.

“I think we’re going to see these companies putting everybody under one roof,” he said.

“You’re seeing a trend nationally where distribution hubs are more centralized and more regional,” Garrett said. “You’ve also had some consolidation in other markets, and that’s also helped Baton Rouge.”

“Petrochemical,” Garrett said, “has been a big driver, with a lot of the plants experiencing some growth with natural gas prices still very low. This region has definitely benefited from that. They drive the market for a lot of the service and supply guys that do business with the plants. They occupy the large portion of the inventory in our market.”

One noteworthy trait of the market is that there still hasn’t been a lot of new construction, though that might be changing a little.

“We haven’t had much new construction, and that’s allowed us to absorb some of the vacant space recently,” Garrett said, noting that’s not without its benefits.

“I think it’s healthy. We didn’t get overbuilt like some of these other major markets that are still suffering through high vacancy rates.”

That said, Garrett added, “I do think we are going to see some new construction related to distribution uses over the next 12 months.”

Guidry said there have been two significant new construction projects:

• Southwest Stainless and Sunbelt Supply combined. As a result, about 40,000 square feet of space was vacated, but a 100,000-square-foot service and distribution center for piping, valves and fittings was built on West Old Perkins Road and Pecue Lane.
• Just behind that, Tyco has gotten under way on a roughly 60,000-square-foot center.

New construction, Guidry said, “is still a very small percentage of the total inventory, but it’s a big improvement over where it was.”

Guidry said there are some new faces sniffing around the local market.

“They throttled back just like everybody else in the recession, but production increased and now they’ve put projects back on the list of things to do,” he said.

He said new entrants to the market tend to start out small — 4,000 square feet, some storage, a manager, a couple of salesmen and some technical support — and expand after a few years.

Garrett said the trough for the market was the first quarter of 2011.

“There are still concessions being made,” he noted, adding “it has definitely stabilized and the stress level has certainly declined.”

Garrett said new entrants to the market can demand and receive favorable rates, while existing tenants are still able to get landlords to renew without a step up in rent because they can say they’ll try to go someplace else.

“In a lot of cases the landlords are just accepting that, if they’re a good tenant,” he said.

Guidry said financing is still tight. Owner-occupied projects can get loans but build-to-suit construction is facing an uphill battle.

Labor costs are low, though material and land costs aren’t.

Still, Guidry said he thinks there will be those who look back and wish they had made a move.

“In five years they’ll regret it,” he said, “because they won’t have these rates and terms.” Guidry said location is the primary factor and access to the interstate is always important. He said some look for the lower prices of the older areas, while others prefer to avoid areas that have seen significant development crop up around them over the years.

“Some will go back to lower-cost stuff,” he said. “They may have been in Cloverland and Industriplex and will go back to Mammoth Drive and South Choctaw because rent is cheaper.”

Guidry said there’s a multiplier effect when supporting industry fills up space. While not as labor intensive as other sectors, workers need places to live and shop.

One development to keep an eye on is the Tuscaloosa Marine Shale, which could be a factor with the industrial market to the north.

“If they can make those wells profitable, and do it in a large way, it could impact some of the stuff to the north,” Guidry said.

Garrett agreed that any improvement in the industrial sector bodes well for the rest of the economy.

“Historically, the industrial real estate market is the first to come back out of a downturn in the economy,” Garrett said. “It’s the leading indicator for the office and retail sector to improve. As companies are starting to see increased demand, you first have to create the inventory and stock it. It’s a healthy sign to see some of the warehousing and distribution companies taking on additional space.”

Looking forward, Garrett and Guidry said they see the current upward trend continuing.

“I do think we’ll continue to see this improved trend for 12 to 18 months, but there’s still going to be a minimal amount of new construction,” Garrett said. “That’s going to help our vacancy rates and occupancy levels as we’re able to fill some of the space that’s out there on the market.”

“We see kind of a continued, slow growth,” Guidry said, “and I think it’s going to be that way for some time, two to three years.”

And even modest growth has its benefits.

“If we continue to see this growth, (employers) are going to have to get competitive; you need better employees, so they take them from one another. And how do you do that? You offer better (employment) packages.”