We need more space: Industrial activity is steadily rising which in turn is pushing supply downward - by Michael Giuttari

MG Commercial Real Estate" width="150" height="150" /> Mike Giuttari, MG Commercial Real Estate

The Rhode Island industrial market, although lacking in new construction, seems to find a way to stay very active. The momentum that picked up in 2014, has continued, and increased, through this year. 2014 resulted in strengthening demand and dwindling supply (no new construction), and this trend continues, except activity levels are steadily rising, pushing the supply of modern industrial buildings downward even further. This is a continuing problem in our marketplace as it becomes more difficult for growing companies to find suitable space. And while many companies are entertaining new construction, in most cases, the cost to build new causes them to re-visit the marketplace looking for existing product as existing building pricing is still lower than new construction cost. In early 2015, pricing had not caught up with the marketplace demand, but there are signs that an upward trend in pricing is occurring now. Below are some of the latest transactions which support this changing market.

In terms of single story industrial volume, there have been some significant sales and leases during 2015. These include a 303,000 s/f manufacturing plant at 275 Ferris Ave. This was purchased by a company from East Hartford, Conn. Similarly, a 175,000 s/f  facility in southern Rhode Island that sat vacant for two years has now been leased in total during the first half of the year. Subsequently, this building at 50 Chase Hill Rd. in Hopkinton was sold to investors last month. A 144,000 s/f facility at 15 Wellington Rd. in Lincoln was sold in May to a fast growing food related industry use from Warwick. This building, on the other hand, remained on the market for less than a month before a deal was consummated. 1425 Cranston St. in Cranston, a 128,000 s/f single story facility   closed last week. In the West Warwick Business Park, the sale of 111 Energy Way, a 65,000 s/f, 24’ clear distribution facility at $43 per s/f is pushing the 50,000 s/f+ size pricing.

Smaller, modern buildings for sale are virtually non-existent. For this segment of the market, we need to create availabilities. A 28,000 s/f building in Cumberland was put on the market by the owner and went under agreement before the property could even be marketed. This property at 20 Industrial Rd. in the Cumberland Industrial Park, closed three weeks ago. Even properties that have sat vacant for one reason or another have been absorbed this year. As an example, 101 Cadillac Dr. in Providence, which has been heavily marketed for two years, closed in May. All these transactions are indicative of a changing market. These deals are strong signals that the market has changed from steady demand/steady supply to strong demand with diminishing supply. 110 Comstock Parkway in Cranston (15,000 s/f) closed two weeks ago at a short term record high of $88 per s/f for a standard single level industrial building. We are out of inventory.

On the leasing side, we maintain a slow/steady pace. The overall absorption is slow. There are a few significant deals in our market, but overall, fairly lackluster. 2 Commerce Dr. in Warwick is a modern, 20,000 s/f building, which had multiple offers and recently leased. Ava Anderson Non Toxic recently moved into 121,000 s/f of high-bay distribution space in Warren, which will be the big lease of the year.

The former Collyer Wire facility, located in Lincoln went from a single tenant, 470,000 s/f warehouse at the beginning of 2014, to a thriving multi-tenant facility with no vacancy as of two weeks ago. Here, tenants have signed deals for high quality, fully sub-divided space at exceptional lease rates. In less than two years, an effectively empty, single story, 500,000 s/f facility is 100% occupied. Again, we are out of inventory.

With all of this demand, our market remains void of new industrial construction. There is evidence of larger users building on leased land in Quonset Business Park. Industrially zoned land is relatively scarce overall, especially “pad ready” sites, but the cost of land acquisition and construction makes it virtually impossible to build a spec building because lease rates are still much lower than the necessary rates for new construction.

Pricing has not caught up with the demand, and it has not for the last 20–30 years. The “seller market” is getting educated and pricing has begun a slow upward trend, which we are seeing in deals. Some of the current smaller (10,000 – 30,000 s/f) industrial deals are going under contract at per sf numbers ($60 - $90) that have not been seen in a long time, if ever. Given the demand in the market, and the rise in pricing, new/spec construction projects seem inevitable.

Michael Giuttari, SIOR, is president of MG Commercial Real Estate, Providence.