Warehouse space: Industrial market slowly improves
When Emerson Ecologics, a Bedford, N.H.-based distributor of nutritional supplements, decided to open a new East Coast distribution center last year, the company looked in several states.
Emerson Ecologics searched Pennsylvania, Maryland and Virginia for suitable sites, said Andy Greenawalt, the chief executive officer of the 30-year-old company, which supplies thousands of vitamins and other nutritional products to health care professionals nationwide.
The company had seen sales growth of 12 to 15 percent a year and needed to find a larger space for a distribution center. It started the search in September 2010, Greenawalt said.
"We looked at what would be the optimal location for a distribution center," he said.
In August, Emerson Ecologics relocated one of its two U.S. distribution centers from New Hampshire to a 43,500-square-foot space in the Enterchange at Walthall industrial park in Chesterfield County.
The Richmond region emerged as an optimal place for several reasons, Greenawalt said.
Having a UPS hub in the area was a key element for the company because of its shipping needs. So was having relatively high availability of new distribution and warehouse space suitable for products that need to be kept in a clean, climate-controlled environment.
Quality of life also was important for the 13 Emerson Ecologics employees who moved from New Hampshire, Greenawalt said. The company has hired an additional 22 people.
In addition, "it is a tremendously friendly business environment," he said of the region. "We were welcomed with open arms."
Those factors seem to have worked in the Richmond region's favor in the market for industrial and distribution space, even though the recession and slow economy that followed put a damper on demand.
Vacancy rates did rise during and after the recession, reaching a peak of 13.3 percent in the second quarter of 2010, according to data from Grubb & Ellis/Harrison & Bates.
Yet there has been some recovery in that sector of the commercial real estate market this year. The Richmond region's characteristics seem to be working in favor of a recovery, albeit a slow one, local market observers said.
"Last year at this time, the market was terrible, and this year it is much improved," said Evan Magrill, executive vice president at Cushman & Wakefield/Thalhimer.
"Much improved over terrible does not make it a good market," he said. Yet, "this year, we have had more tenants enter the area than leave it."
Absorption rates, indicating how much vacant property has been occupied, have turned slightly positive this year after being negative in 2010, according to two local real estate market reports looking at the first half of the year.
The industrial market "is slowly warming back up," Cushman & Wakefield/Thalhimer reported in its third-quarter market report.
The absorption rate for the third quarter was more than twice the quarterly average from the first two quarters of this year. The vacancy rate dropped to 10.8 percent in the third quarter from 11.1 percent in the second quarter and 11.4 percent in the third quarter of 2010.
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Part of the reason for the turnaround is that manufacturing generally has recovered at a faster pace than the overall economy since the end of the recession.
Still, that hasn't translated into major gains in hiring in manufacturing, and it remains a buyer's market for warehouse and industrial space.
Big industrial users are "still exercising caution before expanding or upgrading space," a trend that likely will continue for several more quarters, Cushman & Wakefield/Thalhimer said in its report.
On the positive side, the local market does not have a significant oversupply of buildings for industrial uses, market watchers said.
"The good thing we have got going for us is there has not really been any significant addition to the inventory in the past three or four years," said Chip Louthan, senior vice president of Grubb & Ellis/Harrison & Bates.
The Henrico County-based real estate brokerage also reported in its second quarter report that average lease terms had lengthened from 30 months in 2010 to 35 months in the first half of 2011. That trend seemed to hold steady in the third quarter of 2011, said David Williams, managing director at Grubb & Ellis/Harrison & Bates.
Average asking rental rates are flat to down, however.
"There are still people looking for places, but these are not people looking to rush in," said Richard Porter, executive vice president of Porter Realty, a Richmond-based brokerage that specializes in commercial and industrial real estate.
"I think they know that with some exceptions, it is still a tenant's and buyer's market. I think most sellers recognize that."
Grubb & Ellis/Harrison & Bates still expects a "drifting" vacancy rate of 10 to 12 percent for the rest of this year. The firm said it expects an uptick in sales of small industrial and office and warehouse buildings, but that large users will continue to put off expansion and relocation plans.
While the overall economy continues its sluggish growth, the Richmond region seems to be benefiting from its geographic location and relatively low cost of business, which is attractive to companies that are still growing while also looking for ways to improve efficiencies.
"Richmond is not a vacuum, of course," Williams said. "We are in the No. 1 state in the nation for business, and we have a vibrant market engine just two hours to the east," with the Port of Hampton Roads.
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The Emerson Ecologics move was among the bright spots for the Richmond region this year.
But there were other deals.
For instance, Cabinets to Go in April bought a 130,560-square-foot building in the South Point Business Park in Prince George County, to use for the expansion of the company's kitchen and bathroom remodeling products.
The largest transaction this year happened in April, when a venture between Miami-based Adler Real Estate Fund and Dallas-based TriGate Capital bought the Byrd Center Business Park in eastern Henrico for $26 million.
The Byrd Center, which was 90 percent leased, is a 475,000-square-foot, 10-building industrial-property complex near Richmond International Airport.
In the third quarter, one notable lease was of a 44,192-square-foot property on Washington Highway in Hanover County by Enviva, a company that uses biomass, such as wood pellets, to produce energy.
Copyright Richmond Times-Dispatch. Used by permission.
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