Well, Where Do We Go From Here?

3rd Quarter 2011 Hotline

Market Watch
Southern Industrial Development

by Joe A. Hollingsworth, Jr.

By now, it’s no secret we are in a national economic “soft patch”. Which way do we go from here, a second recessionary dip or more trepid growth? Your guess is as good as mine, but our companies are betting moderately heavy on returning to cautious growth, in part, because of the way this soft patch occurred.

A brief recap of the occurrence is, in August 2010, the industrial sector got a lift from more visits and from the stabilization of per square foot rent amounts that continued until the election, when the House of Representatives/House Budget Committee went conservative. This trend continued until the turn of the year when
the “tax deal” was struck, thus settling the tax rate issues. The improving industrial market continued its slow comeback until this April when the national debt/spending cut issues dominated the national discussions. April 2011 saw the number of first visits and the quality of those visits, as well as resulting serious offers, completely fall of the edge. Once again we see that “business hates variables” and can only factor very few variables at one time in the decision to deploy capital. When the debt ceiling/spending cuts and the Republican hopeful field is settled in August, enough major variables will be off the table for deployment of capital to return, at which time, new deals and first visits will be back in a trepid way.

If we are right in our prediction on the economy, we will see these trepid trends in place through mid 2012. We believe new construction costs have already gained back roughly half of their 16.5% costs drop from their peak to their trough. This gain is a huge headwind for new construction, especially speculative construction. This is coupled with a glut of used structures on the market that are priced extremely competitive well below new construction costs. There are a few markets that have exhausted their supply of usable/efficient existing space, but many more locations need to absorb their existing building inventory in order to change the dynamic back up to rising rents or make new construction seem attractive again. This could happen (barring another huge surprise) by mid 2012, which would finally create the need for new construction of industrial structures but not to the extent of the volumes previously experienced.

So, the question for new space developers, if they can get credit, is “Do we build it today at the lower construction costs and have a 5-7% annual carry cost or wait and build a year from now at a possible 5% premium above today’s construction costs?” While we believe most will delay construction, we still see “gold” in building new construction in the geographic areas that have no competing used structures.

“Joe Hollingsworth participated as one of our first equity investors. In addition, Joe Hollingsworth has served as a board member and leading advisor for strategic planning and direction.” — Scott Kelley, President and CEO, Service Center Metals