Laurel Bailey, COO of Industrial Properties of the South has written an Industrial Market update for the Huntsville/Madison County area based on her presentation at the CCIM Market Symposium in May.
Good news! The Huntsville Industrial Market is tight and increased demand is on the horizon. With the announcement of the Toyota/Mazda plant slated to open in 2020 (in Limestone County), I am already receiving calls for industrial and office space from vendors who want to be near the plant. I know many other developers are working on “build to suit” options for prospective companies. With a vacancy rate between 7-9%, the lack of industrial inventory in Huntsville is going to be a weakness for future economic growth to support the Toyota plant and associated suppliers.
Where have all the spec industrial developers gone?
For most of my company’s history, we have built buildings without a tenant. For various reasons, this model doesn’t work anymore. I see three main constraints for speculative development: 1) Construction prices are volatile and increasing. The proposed Trump tariff has caused construction prices to skyrocket. Any products containing metal have increased 25% or more. Concrete prices and labor costs are also on the rise. 2) rental rates are too low to justify new speculative construction. With current tilt-up concrete buildings ranging from $80-$100 psf, the rental rates to justify these costs would be close to $8.00 psf, or more. Huntsville’s average rental rate is hovering around $6.50 psf. 3) the long timeline needed to complete the development process. A project can take 12-18 months and by then, the market could have changed, leaving you stuck with an empty building. A long timeline is just risky when building without a tenant lined-up.
Based on these constraints, developers will need to get creative to meet the increasing demand for space. Some options to consider are: to purchase existing buildings that can be modified, pick sites located in less expensive submarkets and cut construction costs wherever possible. For the remainder of 2018, I see an increasing demand for industrial space, which will hopefully result in rents rising and thus a justification for new spec development. Until spec construction makes financial sense, I’ll keep adding to my waiting list of prospects.