Overview of the commercial real estate market in Orange County

The prolonged recession continued to dominate the real estate markets worldwide in 2009 and Orange County was no exception. While a cursory look at the numbers indicates that the industrial inventory increased by over 625,000 s/f in 2009 - a level of growth not seen since 2002 - a closer look shows that it is the addition of one building that accounts for the significant jump. The build-to-suit construction by Panattoni Development of the 500,000 s/f distribution facility at Pine Lane Business Center in Wawayanda for Medline Industries is now completed, but not fully occupied; Medline occupies 350,000 s/f, and has been seeking an interim tenant for the balance of the space. The inventory of prime industrial real estate at year-end 2009 stood at 19.4 million s/f. Other than the Medline build-to-suit, there were four other new buildings constructed in the county in 2009. Two were built-to-suit: 60,000 s/f in Newburgh for F.W. Webb, and 20,000 s/f in Chester for Best Mexican Foods. The other two were constructed on spec: a 26,000 s/f building in Crawford that is vacant, and a 6,300 s/f building in Montgomery that is now fully leased. The other additions to inventory were expansions of two existing buildings in Chester and Monroe. There are also a few new buildings presently under construction in the county, all of which are build-to-suit. Among them are the 348,000 s/f building in Chester Industrial Park for C&S Wholesale Grocers (slated to come on-line in 2011) and the 67,000 s/f steel fabrication facility for Orange County Iron Works in Montgomery that is expected to be completed in 2010. As expected, the larger projects planned by developers are on hold pending a turnaround in the economy. Panattoni has a pre-approved pad site ready to accommodate a 240,000 s/f building, also at Pine Lane Business Center, and has finally received approvals for its 500,000 s/f facility in Montgomery. Hudson Valley Crossing has approvals in place for three buildings totaling 1.2 million s/f on the Montgomery/Hamptonburgh border. Whenever the economy rebounds, the county will easily be able to meet demand for large industrial facilities. But nearly 90% of the roughly 500 existing industrial buildings in the county are less than 100,000 s/f in size, and the bulk of demand from existing companies has historically been for relatively smaller units of space. Demand for these existing buildings remains strong, given the comparative cost of new construction, and supply continues to be limited. This sector of the industrial market never experienced the rapid expansion of its inventory, nor (to-date) has it been plagued by an abundance of distressed loans, as has been the case with the residential and retail sectors. Yet many buyers remained on the sidelines, waiting out this period of uncertainty, or anticipating that the market would further "bottom-out." Those buyers who were able to participate in 2009 reaped the benefits. Sale prices of some industrial buildings that closed in 2009 were as much as 10% to 15% lower than previous years, but other sales indicate price declines of only about 5% to 8%. It should be noted, however, that this is more supported by consensus of opinion rather than actual data, given the limited number of deals that closed in 2009. Approximately 725,000 s/f of industrial space was absorbed in the County in 2009 (in addition to Medline's 350,000 s/f). Nearly 60% of this activity was through lease transactions and 97% of those were in existing buildings, not spec space. Among the more significant transactions are Amazing Savings' lease of 90,000 square feet in Chester; Corsicana Bedding's lease of 85,000 s/f at Panattoni Business Center in the Town of Wallkill; and 40,000 s/f leased by Safelite AutoGlass on Turner Dr. in the Town of Wallkill. All of the industrial space absorbed in 2009 through sale transactions was purchases of buildings under 60,000 s/f in size. Some of the notable deals were Gabrielle Manufacturing's acquisition of the 53,000 s/f former furniture manufacturing facility on Bond Street in Central Valley; Feinkost Foods' purchase of a 40,000 s/f facility in the Town of Montgomery; and Kal Pac Corp.'s acquisition of a 33,000 s/f building in the Village of Montgomery. At year-end 2009 the overall vacancy rate for prime industrial space stood at 15%; however, after removal of the largest available building in the county (which is in contract and reportedly closing in early 2010), the vacancy rate drops to 12%. While this is higher than the national industrial vacancy rate of 10.2% (as per Integra Realty Resources), over 65% of what was available in Orange County at year-end 2009 were blocks of space exceeding 100,000 s/f in size. Until employment rebounds and consumer spending increases, it is likely that the large distribution centers will generate a low level of activity. Going forward, most of the demand for industrial space will probably continue to be for "smaller" units, particularly as some companies downsize in an effort to reduce costs and weather the storm. But Orange County's vacancy rate for industrial space under 100,000 s/f in size was a critical 5.8% at year-end 2009. For property owners with large vacant units that are able to be subdivided for smaller tenants, there exists an opportunity here. Or perhaps the irony of this extended recession is that it may generate further availability of inventory to correct this market imbalance. The positive news about the Orange County market is that financing is available for those companies seeking to purchase industrial facilities. Primarily a market of community banks and credit unions, these lenders avoided the risky practices that got other institutions into trouble. Let's be clear, though: the underwriters are not making it easy, but financing is available. Elizabeth Mansfield is the founder and president of Mansfield Commercial Real Estate, Goshen, N.Y.