Steady demand, with no end in sight. That’s the best way to describe the industrial markets in Ohio’s three biggest cities of Columbus, Cleveland and Cincinnati.
Just look at the numbers: JLL forecasts that demand for warehouse space in Columbus was expected to surge 61 percent in 2021 when compared to a year earlier. JLL’s Industrial Tenant Demand Study found that Cincinnati is fueling more than 1 million square feet of demand for consumer products, making it one of the key cities for industrial demand in the nation.
And Crain’s Cleveland Business said that Cleveland has seen a year-over-year increase in demand for industrial space of 22 percent, something that has inspired developers to deliver more warehouse and distribution space to the market.
Midwest Real Estate News spoke with three industrial pros with JLL about these trends, Dan Wendorf, senior managing director with the Columbus office of JLL; David Stecker, JLL vice president in Cleveland; and Brian Leonard, managing director with JLL’s Cincinnati office.
All three said that industrial demand in their markets continues to rise. And a future slowdown? Neither of them has seen any evidence yet of that.
Let’s take a look at the industrial markets in each of Ohio’s biggest cities. I’ll start with Columbus: How strong is demand for industrial space here?
Dan Wendorf: We are sitting at record-low vacancies. Our vacancy rate was at 3.8 percent for industrial in the Columbus market. That’s the lowest since we’ve been tracking data. We forecast that we are going to be near that level of vacancy for the next 24 to 36 months. The amount of demand that we are seeing puts Columbus in the top echelon of demand markets across the Midwest. What’s especially impressive is the diversity of that demand across various user groups. It’s not just ecommerce. There is demand from a variety of sources.
We do have a healthy development pipeline, but it is barely meeting the demand we are sitting at today. We are seeing rental rates increase, and we are seeing developers starting to push out and put some dirt into development sites that otherwise might have been looked over. We will continue to see this demand. We see no headwinds here. This is not a blip. This is not a bubble that is going to pop. This is a new point in industrial real estate that is here to stay.
How about in the Cincinnati market? How strong is industrial demand there?
Brian Leonard: The demand is certainly outpacing our supply in Cincinnati. During the last 24 months, we have seen six to eight build-to-suits in the market. Historically, we would have seen just one or two during that period. We are also seeing emerging markets. Developers are pushing out to areas that they rarely targeted in the past. They’re doing that because our market can’t keep up with the demand for industrial product.
And how about in Cleveland?
David Stecker: Historically, a lot of the industrial space in Cleveland has been manufacturing space that had been repurposed into distribution space. We have seen an influx of spec industrial construction during the last 48 months to account for an increase in demand and the outdated supply. That speculative inventory has pre-leased or leased within 90 days of delivery.
Our rental rates are continuing to grow. We are also seeing larger developers who had shied away from Cleveland in the past now exploring our market. They are looking for quality land sites to build more spec product. The labor pool here is strong compared to some other competitive markets. Some larger big-box users, those seeking, close to 1 million square feet, have now landed in Northeast Ohio because of the availability of labor.
The industrial sector has thrived during the COVID-19 pandemic. Do you think many of the habits that consumers have developed during the last 18-plus months, which have fueled the need for more warehouse and distribution space, will continue after the pandemic passes?
Leonard: I do a lot of work with a national grocer. That client certainly thinks that online ordering and delivery will continue. I just look at myself and my family. I had never done any sort of grocery delivery to my home. Now it is something we do on a fairly regular basis. Grocers had planned that during the next five years maybe some young people would move to online ordering and delivery. Grocers didn’t expect that COVID would fast-forward that trend. The movement to online delivery was five times faster than what they had anticipated. The pandemic changed the behaviors of the consumers, which changed the behaviors of grocers and Amazon and the groups that feed Amazon.
Wendorf: The demand for online shopping was definitely rising before the pandemic, and it was expected to continue to increase. It was not expected to increase as much as it did in one year, though. The other aspect of this is that there is arguably not a single company that wasn’t exposed with supply chain vulnerabilities during 2020. A lot of these companies had to implement new supply chain strategies. They were running lean and had to beef up a bit to meet the new demands.
Stecker: We are seeing a push from companies that want to have warehouse space closer to their customers. We have been the beneficiary here of that trend. We weren’t a heavy distribution hub traditionally. Our market was served out of other distribution-hub markets. Now we are starting to see these hub-and-spoke supply chain models. We have been the beneficiary in Cleveland of groups trying to get closer to their customers.
Are you worried at all that it will be difficult to fill the new spec industrial space coming to these Ohio markets?
Wendorf: I have zero worries about it being filled. Seven of the last 10 spec developments in the Columbus market have filled prior to roofs being placed on them. A lot of tenants want to get into their new buildings in four months. The only space they can go to is a spec building, an existing building. The speed at which people are making decisions today has boosted the need for spec product. A lot of users are also not build-to-suit candidates. They are not comfortable with the lease terms they’d have to commit to. They are not comfortable with the capital allocations you need to get into a build-to-suit building. There is not a market in the United States that has a great oversupply of industrial spec based on the industrial market right now.
Leonard: There are certain parts of our market in which companies do have trouble finding enough labor to staff their properties. That’s the one thing developers have to look at: Is there enough labor in an area to staff these spec properties once they are built? If they stay true to the analytics of labor, developers are having no issues filling any spec buildings in our whole industrial corridor.
What makes your industrial markets so attractive to developers?
Stecker: Cleveland’s available inventory is an important part of why you’d want to do business here. Companies want to do business where there are existing facilities or where facilities are going to be delivered in short order. Then there is the strength of our labor force and the lower cost-of-living here. That is an attractive piece for site selectors. Wages go further here. There are good schools. This is a good place to live.
Leonard: The biggest draw for Cincinnati is the ability companies have to hit the population density of the United States in a one-day truck ride. You can go east/west or north/south and reach most of the country quickly. We also are an affordable place to live. We have a strong labor force. And as you stretch our market, you have the ability to almost connect Dayton to Cincinnati. That makes us a wide, deep market.
Wendorf: We have such a diversity of industry here in Columbus. We don’t rely on just one or two industries. Then there’s our location. People don’t understand that you can reach 10 percent more of the U.S. population in a one-day truck drive from Columbus than you can from Indianapolis. From Central Ohio, you can reach more households, people and retail stores. People want their stuff quicker and quicker. Two-day delivery seems like weeks now. Being close to the consumers is a key, and that bodes well for Columbus.