Chrysler Plant Closing in Twinsburg - Some Thoughts

There are 27 buildings in Northeast Ohio with 1,000,000 square feet or more with a total square footage of 52,083,208 and vacancy rate of 8.0%.

If the Chrysler stamping plant in Twinsburg closes at the end of 2010, the vacancy rate of theses buildings will increase to 12.6%.

This plant consists of 2,400,000 square feet and sits on 165 acres.

At its employment peak in 1999, this facility employed 2,188 people.

Average asking lease rate of these building with available space is $2.50/sq ft, triple net.

The few sale comps on public record of these buildings are below:

4300 E. 49th Street, Newburgh Heights (Charter Steel) 1,740,000 square feet;

• sold 2/27/02 for $3,200,000 ($1.84/sq ft)

5400 Baumhart Road, Lorain (former automotive plant) 2,500,000 square feet;

• sold 12/18/06 for $2,527,181 ($1.01/sq ft)

20001 Euclid Avenue, Euclid (Euclid Business Park) 1,138,236 square feet;

• sold 5/2/01 for $9,117,000 ($8.01/sq ft)

23555 Euclid Avenue, Euclid (Argo Tech) 1,750,000 square feet;

• sold March 2007 for $5,700,000 ($3.26/sq ft)

2509 Hayes Avenue, Sandusky (Kyklos Bearing Plant) 1,321,947 square feet;

• sold 8/7/08 for $25,500,000 ($19.29/sq ft)

The average sale price for buildings in this size range is $9,208,836 ($6.45/sq ft)

As of right now there are five that are STILL automotive facilities:

GM Corporation: 5400 Chevrolet Blvd, Parma-3,000,000 square feet

Ford Motor Company: 5600 Engle Road, Brook Park-5,200,000 square feet

Ford Motor Company: 650 Miller Road, Avon- 1,300,000 square feet

Ford Stamping Plant: 7845 Northfield Road, Walton Hills-2,100,000 square feet

If the Chrysler building were to become vacant, it would be the the best located and most modern of these 1,000,000 + facilities. Having said that, it is unlikely the lease rate for the building would be much higher than the average lease rate of $2.50, triple net. Large manufacturing plants are expensive to maintain and are typically constructed for a specific use which is not easily refitted for different uses.

The value in this property is both the land and the building, which was not the case in the most recent automotive plant sale in Lorain, where the land had little, if any value.

Twinsburg land is worth around $100,000 per acre for end users, and $30,000 per acre if sold in bulk, or just under $5,000,000. Unless sold to the perfect end user, the building is not likely to be worth more than $12 to $14 per square foot, and depending on the condition of the inside, perhaps closer to $6.00 per square foot. And would likely be sold to a redeveloper who would sell large pieces of the plant as scrap, sell off or redevelop the land on 82, and lease out the vacant space in the balance of the building. Because it was a stamping plant, the building probably does not have enough docks for today's needs, and ceiling heights of varying heights, but not the minimum of 24 feet which is standard today.

The former Lorain Ford plant has had a dampening impact on lease rates and values not only in Lorain, but in the surrounding markets as well. And that plant has yet to attract any large employer companies, despite having a paint plant in excess of 500,000 square feet with state of the art amenities and less than 10 years old.

One could argue that the best long term value for the Twinsburg stamping plant would be to buy it, scrap the plant for as much money as possible, and redevelop the site as an industrial park. Selling land to end users who will build their own properties will create more value and jobs than keeping the building up.

165 acres equals 7,187,000 square feet of land and at about 20% building to land coverage that equals 1,437,480 square feet of new construction. New building costs hover around $45 psf which translates into approximately $64,000,000 in real estate value. A higher ground coverage will increase the $64,000,000, but we can use the lower number to be conservative.

Last year the property paid $660,000 in real estate taxes. At $64,000,000 in value the property would generate annual real estate taxes of $1,280,000. Assuming an absorption rate of 10 years, the property would generate double the amount of taxes in ten years than it did last year.

It is not likely that the development will ever employ as many people at Chrysler did at its peak, but assuming one job per 1,000 square feet, the job count would be around 1,400. The impact of the income tax loss will never be fully replaced. But even if a manufacturing company were to use the entire building in its existing condition, it is unlikely the peak employment number would ever be reached again.

The loss of the Chrysler building is devastating to Twinsburg and North East Ohio. But the demand for modern warehouse and manufacturing space remains high. The vacancy rate in our market for buildings built since 2000 is under 1%, which is among the lowest vacancy rates in the US. Companies prefer newer, more efficient properties. Rather than leaving the buildings up and fighting for deals based solely on rent, differentiating the site through quality of buildings and attractive park amenities will attract better paying employment.

With patience and planning this site can be reutilized to the benefit of the city, former employees and tax payers through out the region.

Recent Recessions & Jobless Recoveries

Length of Recent Recessions & Jobless Recoveries
July 27, 2009

With an end to the recession in sight, the strength of the recovery is the next big topic of discussion. Most analysts expect a tepid rebound, and recent history supports this outlook. The term "jobless recovery" came into usage after the 1990-91 recession to describe the condition where GDP was growing but not fast enough to encourage businesses to hire. Payroll employment languished after that recession ended, failing to rise above even its end-of-recession level for another 14 months. Employment did not surpass its pre-recession peak for another nine months after that. The jobless period lasted even longer following the 2001 recession, with employment failing to rise above its end-of-recession level for 29 months. It was another 10 months after that before employment rose above its pre-recession peak. If recent history is any indication, commercial real estate leasing conditions will be moribund for at least the next year and probably longer, particularly given the risk-averse credit markets. However, employers are running their businesses at very lean levels, having been quick to cut both inventories and payrolls beginning last September when the credit markets nearly shut down. Labor productivity remains unusually strong for a recession, and second quarter corporate profits were surprisingly resilient. This raises the possibility that even a modest increase in demand could prompt employers to resume hiring, which would shorten the jobless recovery and hasten a true labor market recovery – a hopeful outcome for commercial real estate. Source: U.S. Bureau of Labor Statistics, Grubb & Ellis
Robert Bach, Senior Vice President, Chief Economist, has 30 years of professional experience in real estate market research, consulting and city planning. His commentary on the real estate markets is provided here on a weekly basis.

Recession - An Update

Six-Pack of Good News

The Conference Board's index of leading indicators increased 0.7 percent in June, its third consecutive monthly gain and the sharpest three-month rise since 2003. The index is a weighted average of 10 key variables designed to forecast economic conditions six to nine months in advance. The latest reading is a clear sign that the recession is drawing to a close.
Dismal Scientist, part of Moody’s Economy.com, identified 23 metro areas where the recession is moderating. Click here to view the list and read the article.
The Dow Jones Industrial Average ended yesterday above 9000 for the first time since early January thanks in part to a $2.3 billion quarterly profit reported by Ford Motor Company. Although the profit was attributable to debt restructuring, Ford stock rose 9.4 percent on the news.
Existing home sales rose 3.6 percent in June, the third consecutive monthly increase and the longest string of gains since 2004. Condo sales increased by 14 percent while single-family sales gained 2.5 percent.
Last month Goldman Sachs repaid the $10 billion it received in TARP funds, and now the company has paid $1.1 billion to repurchase the stock warrants issued to the U.S. Treasury. Taxpayers made an annualized return of 23 percent. Click here to read an article from The Associated Press.
THE RECESSION IS OVER… in Canada, reports the Bank of Canada. Click here to read the article in The Globe and Mail.

Commercial Vacancy Rates & 2009-Q2 Industrial Market

Commercial vacancy rates for the four core property types increased significantly in the second quarter. The industrial market ended the quarter with 10.7 percent of its space empty, an eye-popping 120 basis-point increase in a single quarter. This was by far the largest quarterly gain since 1986 when Grubb & Ellis began tracking national market data. The office vacancy rate moved higher by 100 basis points to end the quarter at 16.6 percent. Both property types could be on track to exceed their peaks of the early 1990s. Retail and apartment vacancy rates also increased but at a more modest pace. Look for leasing market conditions to bottom out late next year or the first half of 2011, followed by a sluggish recovery. While the four core property types are expected to ride through this cycle together, the industrial market may be positioned slightly ahead of the pack; the industrial construction pipeline empties out more quickly due to the shorter construction times, while a pick-up in global trade led by emerging markets could help support demand for light manufacturing and distribution space. Source: Reis, Grubb & Ellis

U.S. Industrial Market First Look: 2009-Q2
· The pace of softening intensified in the second quarter as the vacancy rate soared by 120 basis points to end the quarter at 10.7 percent. This was by far the largest one-quarter gain in the 22-year history of Grubb & Ellis’ survey, easily breaking the record of 70 basis points set in the prior quarter. Vacancy was lowest in Los Angeles County at 3.1 percent, although the availability rate of 8.3 percent indicates that the vacancy rate will rise as leases expire. Vacancy was highest at 19.7 percent in Kalamazoo, Mich., a region that is working hard to shore up its industrial base.
· Net absorption was mired deep in the red for a second consecutive quarter, registering negative 43 million square feet on top of the 40 million square feet vacated in the first quarter. The silver lining was that only 13 million square feet was completed, the lowest quarterly total in nearly five years. Users in Northern and Central New Jersey gave back nearly 9 million square feet of space, far ahead of second-place Atlanta where just shy of 6 million square feet was returned. Twelve of the 58 markets tracked by Grubb & Ellis did manage to stay in the black, led by Denver with 813,000 square feet of positive absorption.
· Space under construction plunged to 27 million square feet at the end of the second quarter, its lowest level since at least the early 1990s. The Greater Philadelphia region, encompassing Central and Eastern Pennsylvania, led all markets with 4.1 million square feet yet to be completed, followed by second-place Houston with 2.6 million square feet. Southern California’s Inland Empire, a longtime construction leader where nearly 22 million square feet was delivered in 2007, ended the second quarter with just 1.6 million square feet in the pipeline.
· The average asking rental rate for all types of industrial space offered on the market at the end of the quarter was $5.54 per square foot per year triple net, a decline of 2.7 percent from the year-ago quarter. The average effective rental rate declined by 22 percent over the past four quarters, driven lower by generous periods of free rent and other concessions to tenants.

Forecast

The industrial market is not living up to its reputation for relatively moderate swings in leasing market cycles. The 120 basis-point increase in the vacancy rate during the second quarter was the fastest pace of softening among the four core property types. The drivers of demand for industrial space – retail sales, logistics, global trade and the construction industry – all have taken big hits in the current recession. The sharp increase in the second quarter vacancy rate to 10.7 percent raises the possibility that the market may come close to the previous record of 13.7 percent posted in the first quarter of 1992. Ironically, given the rapid pace of deterioration, the industrial market could be the first to turn around. China’s efforts to rescue its economy – a $586 billion stimulus package (larger as a share of GDP than the U.S. stimulus) and a robust expansion of credit by the state-controlled banking system – appear to be putting the country on track to achieve its GDP growth target of 8 percent this year. This is a hopeful sign for U.S. exports and, by extension, demand for light assembly and warehouse/distribution space.