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Anita Zimmerman: Construction of spec office buildings could begin within 24 months.
Anita Zimmerman: Construction of spec office buildings could begin within 24 months.

Industrial vacancies rise as office sector fills gaps

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The commercial real estate market is changing, and local brokers say current conditions present clear opportunities and risks.

In the third quarter, a 125,000-square-foot chunk of industrial space became available with the closure of the Cargill plant in Springfield, and the office sector tightened up with a pair of new tenants at the Sunshine Technology Center, according to commercial real estate data from Xceligent.

During the quarter ending Sept. 30, Cargill finished shuttering its meat slicing and packaging facility at Springfield Underground, at Kearney Street and U.S. Highway 65, after announcing in January it would close and lay off 188 employees.

The move helped push the industrial vacancy rate to 5.6 percent from 4.4 percent a year ago, according to Xceligent’s third-quarter Market Trends Report.

Tracking commercial moves and vacancies in Springfield, Strafford, Rogersville, Ozark, Nixa, Republic and Willard, the report found office vacancies fell to 8.8 percent from 12.2 percent in third-quarter 2014.

Zenith Climbing Center LLC and Two Men and A Truck accounted for the largest office impact when the companies occupied 21,120 square feet at 3534 E. Sunshine St.

The retail vacancy rate landed at 5 percent for the third quarter, about consistent with the second quarter this year and the third quarter last year. Planet Fitness led moves in that sector, filling 24,000 square feet at the former Price Cutter store at 1730 S. Campbell Ave. Party City also occupied its new $1.2 million, 14,000-square-foot building at 2620 S. Campbell Ave.

Anita Zimmerman, commercial sales and leasing agent with Wilhoit Properties Inc., said Cricket Wireless, a prepaid wireless service provider and division of Dallas-based telecommunications giant AT&T Inc. (NYSE: T), signed leases to fill a half-dozen commercial spaces around town between July 1 and Sept. 30.

In all, Cricket Wireless is occupying about 12,000 square feet in retail centers such as The Galleria, Sidewalk Plaza and the Glen Isle Center.

“They took some of that second-generation retail space and helped fill a gap,” she said.

Zimmerman, who serves on Xceligent’s local retail board, also marked a milestone during the quarter when she signed an August lease with Hurts Donut Co. for 1,600 square feet at Gallery Eleven – the shopping center’s last available space.

Spec market caution
In the last year, Springfield Area Chamber of Commerce economic development executives have called on local developers to build speculative manufacturing and warehouse space to help attract new employers.

In late February, a project by commercial appraiser and property owner Eric Roberts met the request, but the market has responded sluggishly.

Via Roberts Industrial Rental, he wrapped construction on the 30,000-square-foot Westgate Industrial Center, 2630 N. Westgate Ave. Marketed since the first of the year, it’s only 25 percent occupied.

“I am not advising anyone to go out and build spec industrial space,” Roberts said, noting leases fetch relatively low rates compared to the costs. “Had we not owned the land with the pad site built before the recession in 2007-08, it is unlikely we would have built this.”

Originally planned for development before the recession, Roberts sat on the land near Partnership Industrial Center West until he felt the market conditions were right.

According to Springfield Business Journal archives, the spec property was built for $750,000. Dish Network occupies 7,500 square feet, and lease rates for the remainder are $4.50-$5.30 per square foot. According to Xceligent, the average triple net industrial rates have increased to $4 per square foot from $3.71 the previous quarter.

Ryan Mooney, the chamber’s senior vice president of economic development, said while availability in the industrial sector has increased, development opportunities remain.

“We have several solid, older manufacturing buildings that are well managed and are great options for companies as they grow. Warren Davis has done an amazing job investing in and almost filling up the former Solo building. We even have some specialized space, like the freezer space that Cargill vacated in Springfield Underground,” Mooney said via email. “But we also need options for the demands we are seeing by our current prospects.”

Manufacturing executives scouting Springfield often seek ceiling heights of at least 28 feet, wide-open layouts with generous column spacing and the ability to expand on-site.

“That’s a need that the private sector is just beginning to consider helping us meet,” Mooney said.

Waiting on absorption
With office market vacancies dropping, Zimmerman said speculative building in that sector might be ripe in another 24 months or so.

“There is still a lot of office space to be absorbed,” she said. “It used to be that everyone had their own private office. In today’s day and age with the technology we have and the way everyone is operating more collaboratively, when people are looking for office space, they are looking for a totally different layout than they did five or 10 years ago.”

Adding to developer considerations, Roberts pointed to the threat of increasing interest rates.

Earlier this year, Roberts refinanced much of his development debt into a 10-year fixed loan paying an extra 0.75 percent to protect against a large increase.

“It seems to me many investors have forgotten what might be considered normal,” he said.

Roberts said a 3 percent increase in interest rates financially amounts to a 20 percent increase in vacancies across his 20-property inventory totaling 500,000 square feet. In 2006, he secured a loan for 6.95 percent.

“It sounded good then. It doesn’t sound too good now,” he said.

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