Industrial vacancies dwindle as manufacturing sector recovers

As the weak economy continues on a gradual recovery path, one of the few bright spots has been a healthy manufacturing sector.

Manufacturing remains a cornerstone of the southeastern Wisconsin economy, and the good news is the sector continues to grow. The ISM index for the Milwaukee area was at 55.5 in October (when the index is above 50 it indicates growth). Despite the headwinds in the economy, the U.S. and Milwaukee area ISM indexes have been above 50 throughout 2010 and 2011. The local manufacturing sector appears to be outperforming the national manufacturing sector, the U.S. ISM index dipped in October to 50.8, from 51.6 in September.

“Almost every manufacturer I’m talking to says their orders are still very strong,” said Jeff Hoffman, vice president of Pewaukee-based Judson & Associates.

The strength of the manufacturing sector combined with a lack of new construction since the beginning of the Great Recession, has resulted in a rejuvenated industrial real estate market in southeastern Wisconsin.

The region’s industrial space vacancy rate is now at 7.6 percent, and has been on a steady decline since it peaked at 9.2 percent in the third quarter of 2010, according to Xceligent Inc.

The industrial space vacancy rate is particularly low in Racine County, which has lost several manufacturers over the years, but has a lack of available, modern industrial space.

The industrial space vacancy rates by county, according to Xceligent are:

  • Racine – 3.2 percent
  • Waukesha – 5.1 percent
  • Washington – 5.2 percent
  • Walworth – 6.3 percent
  • Sheboygan – 6.5 percent
  • Kenosha – 9.8 percent
  • Milwaukee – 10.1 percent
  • Ozaukee – 12.8 percent

Also, the region’s industrial real estate market absorbed 1.28 million square feet of space in the third quarter and has absorbed 2.87 million square feet of space during the first three quarters of the year.

“We have noted that quality industrial space is being depleted in many of the more popular submarkets south of I-94 and west of (Highway) 45,” Sam Dickman Jr., president, and Brian Parrish, vice president, of The Dickman Company wrote in the company’s third quarter market report.

The region’s third quarter industrial space absorption was the third highest in the nation, according to Cassidy Turley, trailing only Dallas (2.9 million square feet), Detroit (2.1 million square feet), Chicago (1.4 million square feet) and Dayton, Ohio (1.4 million square feet). Dallas, Detroit and Chicago are significantly larger markets that Milwaukee.

If industrial space absorption and vacancy trends continue more industrial real estate development could eventually occur in the area, said James T. Barry III, president of Milwaukee-based Cassidy Turley Barry.

“It’s too early to be (overly) optimistic,” he said. “I certainly think the trends are moving in the right direction. If those trends continue we are going to see shortages of certain types of space in some geographic areas. We are seeing some (building) additions and new construction for owner occupants. We haven’t seen much of any spec development. I still think that’s a ways off.”

The next speculative or build-to-suit sites will likely be in Racine and Kenosha counties, which tend to attract tenants moving from the Chicago area to southeastern Wisconsin, Dickman and Parrish said.

“We believe pent up demand and dwindling supply of quality product will result in a number of build-to-suit projects over the next 12 months and perhaps a resurgence of speculative projects,” they said.

In fact, two of the few spec industrial developments currently under construction in the region are in Racine and Kenosha counties. Milwaukee-based Wispark LLC and Oak Brook, Ill.-based CenterPoint Properties are building a 183,000-square-foot building in the GrandView Business Park along I-94 in the Town of Yorkville, that will be anchored by Anixter Inc. In Kenosha County, Milwaukee-based Zilber Ltd. is building a 60,000-square-foot speculative industrial building in the Lakeview Corporate Park in Pleasant Prairie.

Despite the strengthening of the market, industrial space lease rates in the Milwaukee area have dipped from $5.02 per square foot in the third quarter of 2010 to $4.92 in the third quarter of 2011, according to Xceligent. The lowest industrial space lease rates are in Milwaukee County, which had a $4.33 average lease rate in the third quarter of 2011.

But more absorption and higher occupancy levels could put upward pressure on lease rates and sales prices for industrial buildings, Barry said.

“We have absorbed most of the distressed industrial real estate (in the area),” he said. “There are still a few bargains left, but there is not anywhere near as many as there had been.”

“Natural tensions between quality supply and increasing demand are causing a stabilization of lease rates that we have not seen for years,” Parrish and Dickman said.

There has been an increase in the sale of bank-owned commercial real estate, Milwaukee area brokers say, as banks are getting more pressure to unload the commercial real estate they took back during the recession and as the market for selling commercial real estate has improved.

Sales of industrial real estate in the Milwaukee area have increased dramatically, according to Xceligent. There were 149 industrial real estate sales during the first three quarters of the year, which already exceeds the amount of industrial real estate sales in the region for all of 2010 (134 sales) and 2009 (97 sales), and will likely exceed the number of sales in 2008 (162).

“We have observed a significant increase in the velocity of property sales and completed lease transactions for industrial product throughout the southeastern Wisconsin region,” Parrish and Dickman said.

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