Entrepreneurial Spirit, Manufacturing Momentum Spur Industrial Sector
That’s the spirit. Specifically, it’s the reemergence of America’s entrepreneurial spirit, fed by relative real estate bargains and the extremely low cost of debt, that has the industrial sector looking up again, according to Larry Callahan, CEO of Pattillo Industrial Real Estate and recent guest on “America’s Commerical Real Estate Show.”
“We are starting to see the entrepreneurial segment of the market awaken,” Callahan said. “It was dead or on life support for a few years. No one wants to ‘catch a falling knife,’ but lots of people get the urge to buy when they know that values and opportunities are on the rise. ‘Animal Spirits,’ as Adam Smith called it, particularly arise when people start sensing that asset values and interest rates have hit bottom.”
Obviously, the Great Recession brought with it much market adversity, but reduced asset prices and competition amounted to opportunity for the resilient players in the industrial sector. Callahan used the words “aggressive” and “selective” when describing the approach of banks these days in ramping up their business. Those factors combined to fuel the owner-user push in industrial real estate, a major thread of the rejuvenated entrepreneurial spirit.
“One preferred category is lending to operating industrial customers… to loan these companies money to buy their own facility,” said Callahan. “It is considered an extension of a commercial and industrial relationship, and they know that the owner-occupant will fight hard to get a return on their investment.”
The result is that market leaders like Pattillo are seeing a lot more inquiries by existing customers to buy their facilities and many new renters asking for options to purchase.
CoStar reported that total industrial sales were up year over year, the average price per industrial square foot having increased from $44.40 in 2011 to $52 this year. On the strength of a more than 62% increase in net absorption from first quarter, the U.S. industrial vacancy rate ended the first half of the year at 9.2 percent, according to CoStar. (The net absorption figure of 46.47 million square feet was still below fourth quarter 2011’s volume.) Flex projects posted a vacancy of 12.3 percent while the warehouse number was 8.8 percent at the end of second quarter. The average industrial rental rate remained static at $5.12 per sq. ft.
The commercial real estate research firm reported that two of the biggest industrial lease signings occurred in the Southeast: the approx. 1.16 million sq. ft. renewal by CEVA Logistics in the Greenville/Spartanburg, S.C., market and the more than 1.04 million-sq.-ft. commitment by Owens Corning in the Atlanta industrial market. CoStar reported that nearly 50.7 million sq. ft. of industrial space were under construction at the mid-year mark after second quarter saw deliveries of 144 buildings totaling more than 11.46 million sq. ft.
Callahan continues to see a surge in manufacturing in the United States, including automotive, aerospace and other heavy equipment firms boosting production in the Southeast. The industry increase is made possible by this country’s growing workforce, competitive edge in power generation, and steadfast commitment to protecting property rights and intellectual capital.
“Despite the fact that most people think all manufacturing is done in China now, the U.S. is still a manufacturing powerhouse and our trends are moving in the right direction,” said Callahan, whose company has built around 450 manufacturing plants. “The USA is the Saudi Arabia of coal and natural gas. The utility industry is making the necessary investments to keep us internationally competitive. And the USA is a large, unified market with a stable democratic government. China is still communist. Europe is not unified. We are still an international safe haven.”
Bull Realty, Inc., Research