It’s a market situation that gets real estate professionals excited: As supply and demand begin to converge, deals happen quickly and prices start to rise.
The market for industrial space is approaching that point in parts of greater Baton Rouge as big plant expansions generate the first ripples of new business activity.
“Demand is extremely high,” says Mike Eades, president of Ascension Economic Development Corp., which scouts available space in Ascension Parish for prospective tenants. “There’s not a lot of vacant space here, and what there is goes quickly.”
Sales and leasing agents say activity is brisk throughout Ascension Parish and in some neighboring areas, with no sign of a slowdown. But while they welcome the rising interest in industrial properties, some strike a cautionary note about the possibility that prices could reach a tipping point.
There’s no denying the market is tight. Of some 25 million square feet of industrial real estate in the metropolitan area, only about 9% was vacant at the beginning of this year. That’s a sharp change from a vacancy rate above 14% that held sway in 2009, according to real estate market data compiled by Baton Rouge Trends.
Scot Guidry, an industrial specialist at Mike Falgoust & Associates, says signs point to a continued pickup in space absorption. He thinks that, barring unforeseen changes in global markets that could blunt the petrochemical business boom, demand for local industrial space will climb.
“It has definitely not peaked, in my opinion,” he says, “and in some ways it’s just beginning.”
A big source of the demand is a host of businesses that serve south Louisiana’s petrochemical and refining industries, which are poised to invest billions of dollars in plant expansions and construction.
The service businesses run the gamut from equipment rental, transportation and construction firms to valve, electrical component and pipe fabrication companies.
Guidry says businesses with “light industrial” needs generally are shopping for 6,000 to 20,000 square feet in a building that can provide both a front office for sales staff and warehouse storage with some truck-loading space. Such configurations in high-demand areas typically fetch $8.50 to $9 per square foot, including taxes, insurance and maintenance costs, he says.
While costs for bulk warehouse space typically are lower, the special needs of some tenants or buyers can push the price up.
A transportation company that will have dozens of large trucks moving in and out, carrying heavy equipment or bulk materials, for instance, might need 10,000 square feet of warehousing on five to 10 acres of “highly stabilized” ground, Guidry says.
The land stabilization work and other costs can push rent toward $12 per square foot, he says.
Not surprisingly, the “hot” areas capable of commanding such prices lie predominantly in Ascension Parish, home to many of the industrial construction projects underway or on tap.
“The epicenter is around (Louisiana) Highway 73 and Highway 30 in Geismar,” Guidry says.
LJ Grezaffi can attest to the appeal of the location, which is just a hop away from Interstate 10 and many of the plants along the Mississippi River.
Grezaffi’s LJG Land Co. in New Roads owns Ascension Commerce Center, one of the few local industrial parks that has new, multi-use space available. He has sold about half of the 700 acres contained in the center, which is zoned for heavy industrial use and lies smack at the junction of highways 73 and 30.
Soon he will see completion of a 1.25-mile paved road through the property that will streamline access to the rest of the park and likely lead toward full occupancy. “We have a list of people who are waiting to move in once the road is built,” Grezaffi says.
Having acquired the property through two purchases around 1999, Grezaffi, who had been primarily a residential real estate developer, says he didn’t get serious about marketing it until about 10 years later. He declines to say how much he paid for the land but says he now is talking with companies interested in 10- to 20-acre tracts that likely will fetch $75,000 an acre.
If Ascension Commerce Center illustrates the benefit of being in the right place at the right time, it also can help explain why little other speculative development of industrial space has occurred in the region.
Grezaffi says the finished cost of the 28-foot-wide concrete road he is building through the park will come in somewhere between $300 and $400 per linear foot. The cost of stabilizing surrounding tracts for use by heavy trucks and other large equipment also is high.
In addition, he had to install large electric power, gas and water lines across the property. “It’s all very expensive,” he says.
Grezaffi says he’s “very confident” his investment will pay off, but agents say developers in locations where industrial demand is more tepid—north Baton Rouge, south Choctaw or Livingston Parish, for instance—might find that the numbers just don’t work.
“If you’re borrowing money to develop land without a tenant in mind, you could have problems,” industrial agent Guidry says.
While the market appears stable in light of the current supply-demand ratio, Guidry points to a potential concern that could arise down the road. “There’s a breaking point in what people will pay for rent,” he says.
Guidry says a few companies that have come to south Louisiana from states where land is more readily available have shown signs of sticker shock as they shop for space.
If land values keep rising, and if regulatory costs such as environmental, traffic and drainage analyses continue to stack up, he says, tenant pricing could become a problem.
While the state’s ready availability of cheap natural gas—a staple for industrial plants—has drawn big players to south Louisiana, Guidry says those companies could reverse course quickly if they sense their profit margins might shrink.
“We need to remember that if it comes to the point where these companies decide they can do it easier in another country,” he says, they will.”
