Manufacturing space sees new uses in the new century
September slid by while we were distracted by the hurricanes hammering Florida. I wonder how many folks are reconsidering their decision to move there to get out of New England’s harsh winters? They are not the only ones thinking about moving.
American manufacturers are thinking about moving too. The hurricanes pushing American manufacturers to consider moving are intense global competition — not only from China, but a dozen other emerging nations from the Big 8 as well. It is every nation for itself here in the 21st century. It is a complex world in which to conduct business, and individual nations and their economies are now so interconnected that they no longer can solely manage their own destiny.
China needs other nations to buy their exports. They compete on price, but to grow their economy they are buying huge quantities of oil, steel, cement and electronics. They are bidding up the price of these commodities, putting financial stress on the countries that buy from them. Will the pressures of $50-a-barrel oil cause the U.S. economy to falter? What about $60 or $70 a barrel? We are likely to find out pretty soon.
In the real estate sector we are seeing more industrial and manufacturing buildings come on the market. Industrial infers heavy industry, such as steel fabrication production. Manufacturing refers to light industry and assembly (now called flex tech), such as electronics and similar technologies.
We just listed for sale a 250,000-square-foot manufacturing facility. The company is moving production south (how far south they won’t say, amigo). The biggest manufacturing employer in the area is 100,000 square feet. If this facility is too big for them, who will buy it? If it is too big for one company, can it house two or three? This is easier said than done, because manufacturing facilities that have expanded over the years to accommodate the growth of one company end up configured entirely differently than a facility built to house multiple tenants. Often the offices are all at one end and the loading docks at the other.
We are marketing another building in which the seller will lease back about a fourth of the space. There is a tenant already in another quarter, but the balance of nearly 50,000 square feet is too big for area companies. In fact, likely tenants are probably only 15,000-20,000 square feet.
Even if two or three are secured to lease the space, the conversion to multi-tenancy will lead to significant inefficiencies and the loss of rentable square feet. If you are trying to sell a 100,000-square-foot building that, when all is said and done, has only 80,000 square feet of leasable space, then you are only going to be paid the value of the 80,000 square feet.
We have sold a half-dozen of these large former manufacturing plants over the last few years. Some are more readily converted to multi tenants and flex tech than others. The ability to gain access to three or four sides of the building is important. The parking and truck docks need to be spread around the building, not all bunched up in one corner.
Some of these properties have real potential. They can be bought at a good price because their corporate sellers are ready to move on, figuratively and financially as well at literally. A key stumbling block is zoning.
Industrial buildings tend to be in industrial zones. Some are more flexible and allow different uses, but many do not. Communities are cautious about changing zoning and uses even if they favor a specific proposal for a specific property because they fear it will set a precedent. But the moving of manufacturing out of the Northeast as well as offshore is a very strong movement. It will continue. So communities need to accept this global economic change and proactively look at adaptive reuses.
This is especially the case in New Hampshire, where property taxes are the primary source of municipal income. Empty buildings fall in value quickly.
We sold a very sophisticated medical manufacturing facility with a replacement cost of $7.5 million for $575,000, less than $8 per square-foot. Four years earlier it leased for more than $8 a square-foot plus all expenses each year! An obsolete building is not worth much, especially when the cost to carry it can be several dollars per square foot plus debt service.
For those with capital, a vision and the resources to change the use, these buildings can be excellent investments. It takes cash to fund the conversion because without tenants signed on the dotted line, banks are timid to lend. But once they are leased the banks trip over each other to write the mortgage.
Look around. You will be seeing a growing number of these buildings changing ownership and changing use. In some cases, the seller may lease back some (but not all) of the space. In others, the former Cabletron buildings in Rochester come to mind — they simply move to smaller more efficient buildings. In adversity there is opportunity. Some investors have been patiently waiting for a half dozen years for these opportunities.
Bill Norton is president of Norton Asset Management. In addition to his active brokerage work, he is a Counselor of Real Estate. He can be reached at email@example.com.