The industrial tortoise seems to have turned warehouse hare.
The leased bulk warehouse market, where space usually empties and fills slowly, shot ahead the past year with statistics not seen since the last century, according to Price Edwards & Co.'s 2012 Mid-Year Industrial Market Summary.
The vacancy rate plummeted from 20.4 percent to 6.5 percent vacant, the lowest since 1999, the firm said, calling the drop “astounding.” Price Edwards defines bulk warehouse space as investment-grade multitenant buildings for lease 35,000 square feet and bigger with ceiling heights 24 feet or higher.
Expect no speculative building boom, although a few medium-sized warehouses are under way, said Price Edwards broker Bob Puckett. Large national tenants are trending toward shorter-term leases, which keeps space more flexible by definition and “weakens the prospects of large-scale development,” Puckett said.
Demand for space was part of it — from national and local tenants expanding with the plodding national economic recovery, as well as local and regional energy-related companies — but most of the space was absorbed with one transaction in May.
Hobby Lobby buys
Hobby Lobby bought three big multitenant warehouses totaling 465,000 square feet just north of its headquarters at SW 44 and Council Road. Hobby Lobby in converting them to its own use, removing them from the leasable property rolls.
Hobby Lobby paid a combined $14,647,500 for the 1970s-era properties, or $31.50 per square foot. The buildings are at 7900 SW 34, 180,000 square feet, built in 1979; also 7738 SW 34, 142,500 square feet, built in 1973; and 7815 Gemini Blvd., 142,500 square feet, built in 1973. The seller was Thackaray Partners of Dallas. Broker John Lenochan of CB Richard Ellis-Oklahoma handled the warehouse sales.
With sale prices and lease rates for existing buildings remaining less than the cost of construction, oil-and-gas service companies are picking off small single-tenant buildings and larger companies are buying multitenant buildings for their own use, sending users off to find new space. In any case, the space is removed from the leasing market.
Not the 1980s
A few old hands in commercial real estate are quietly remembering the joys of the last energy-related property boom, in the 1980s, which lasted right up to the bust. Puckett said he is not one of them.
“It's a different world. It's a different oil boom. It's based on different capitalization,” he said.
The money behind current oil and gas exploration and development comes mostly from publicly traded companies “accessing traditional securitized capital markets such as stocks, bonds and corporate debt facilities,” Puckett said. “This stands in marked contrast to the oil boom of the 1980s, which was rife with small-investor drilling funds and short-term, high-interest bank debt.”
That means more stable cash flow through well operators today, and a more stable business environment for the oil-field service companies that occupy industrial space, he said.
Price Edwards tracked little change in the other two categories of industrial space it follows.
• Flex space vacancy declined from 12.9 percent to 11 percent since midyear 2011 and has hovered at 10-13 percent since 2006. Flex space is suitable for a mix of office, warehouse, lab and showroom areas and generally has ceiling height of 18 feet or less, but includes some newer properties with higher ceilings if they are marketed as flex space.
Most flex space in Oklahoma City was built in the 1980s and “suffers from low parking ratios, low (ceiling) clear-heights and limited truck access,” Price Edwards reported. “Given the consistency of the vacancy over time, we now consider 10 percent to be pro-forma vacancy for these older developments.”
• Service warehouse space vacancy rose from 8.8 percent to 9.5 percent, but accounts for the least amount of industrial space here. The decrease was the result of just 1,500 square feet going dark, the firm reported.
On the north side, most bulk warehouse leases are for $3 per square foot per year; most flex space leases for $6; and most service warehouses lease for $4.
In southwest Oklahoma City: most bulk warehouse leases are for $3.50; most flex leases are $4.75; and most service leases are for $3.50.
In southeast Oklahoma City, most bulk warehouses leases are for $4.95; and most flex leases are for $5; there is no service warehouse space.
• Vacancy: continued decline over the next year.
• Rents: continued rise back to pre-recession levels. Construction: some, moderate.
Price Edwards & Co.'s 2012 Mid-Year Industrial Market Summary, with vacancy rates and asking rent rates for individual industrial buildings for lease, is available free (but registration required) at www.priceedwards.com.