By: Randyl Drummer
The U.S. industrial real estate market’s amazing run shows no signs of slowing as the new year approaches, posting an incredible 19th consecutive quarter of falling vacancy rates to reach its lowest national level in nearly 14 years, ending 2014 at 7.2%.
Given optimistic forecasts for domestic growth in 2015, analysts expect 2015 to be another strong year for industrial space demand. Consensus growth forecast of around 3.5% in gross domestic product (GDP) as more people find work and wages begin to rise, said Bob Bach, director of research for the Americas with Newmark Grubb Knight Frank.
“This is very good news for the industrial market,” Bach said. “Expect the fall in vacancy rates and rise in rents to continue, although the pace should begin to level out by the end of 2015 as construction catches up with demand.”
GDP is considered a primary driver of demand for industrial space because its components — online and brick-and-mortar consumer spending, business spending, homebuilding, exports and imports — all generate activity in the warehouse and logistics market.
Healthy tenant demand, combined with a limited amount of quality ready supply, is tugging down the nation’s vacancy rate, said Aaron Ahlburn, senior vice president and director of research for the industrial and retail property markets for JLL’s Americas region.
“Although new big box construction is escalating, it does not appear to be overpowering current tenant requirements,” said Ahlburn. “E-commerce continues to be the headline-grabbing market driver, especially as retailers continue to determine their omni-channel distribution and fulfillment space needs.”
Outdated distribution centers that don’t support an integrated, omni-channel retail strategy will require updating or face obsolesence, Ahlburn added.
The only unwelcome guest at the warehouse party over the next 12 months could be overbuilding, which developers tend to do in times of economic growth. Even today’s vast 1 million-square-foot-plus mega warehouses are comparatively fast and easy to build, said Andrew Berk, vice president in Avison Young’s Los Angeles office.
According to NGKF’s Bach, the amount of space under construction has been ramping up slowly for 19 of the past 20 quarters. At year-end 2014, 130.5 million square feet was under way — up from 100 million square feet at the beginning of the year, but still below the prior peak of 190.1 million square feet in third-quarter of 2007, during the development heydays of the prior cycle, Bach notes.
Deliveries surged in the fourth quarter to a total of 45.4 million square feet, a quarter of which was completed in Dallas-Fort Worth. Houston was a distant second with 3.4 million square feet coming out of the pipeline. For the full year, industrial deliveries totaled 133 million square feet.
For now, the consensus among most analysts is that supply remains in line with demand across much of the country, even in the high-growth Dallas market.
“To date, no space has broken ground in Fort Worth during this cycle, so we should see landlords enjoying increased rental rates in 2015,” said Transwestern Principal Jeff Givens, adding that the Fort Worth office alone recently completed eight sales transactions totaling 525,500 square feet. “User sales were robust and the leasing market was very active, which increased occupancy.”
There’s so much absorption and a historically low vacancy rate which has remained consistent for so many years that overbuilding does not seem to be a major concern in Class A or even B markets, Avison Young’s Berk added.
“Investors are favoring ‘Main & Main’ assets of almost any condition and size,” Berk said.
He noted, however, that further from the core geographic areas, investors are keen to make sure that the assets are located in good logistics markets with recent upside improvements.
“Development has been more controlled and disciplined this cycle, especially compared to past ‘boom’ cycles,” JLL’s Ahlburn said. “Although a handful of markets, including the Inland Empire, Dallas and Indianapolis, have flirted at times with overbuilding, the majority of U.S. markets are evenly-paced.”
Net absorption was solid at 42.1 million square feet for the quarter and 172.4 million square feet for the year. Atlanta led all markets for both periods, absorbing 3.8 million square feet in the fourth quarter and 8.8 million square feet in 2014. California’s Inland Empire took second place in both periods.
The average asking rental rate ended 2014 at $5.64 per square foot per year, triple net, up by just a penny from the third quarter. The yearly gain was more impressive -an increase of 3.8%. Of the 45 markets tracked in the survey, eight markets posted double-digit rent gains in 2014, led by Austin at 14%.
Other double-digit gaining markets included the Inland Empire, Indianapolis, San Antonio, Silicon Valley, Denver, Boston and Oakland-East Bay, according to NGKF and CoStar data.
Finally, risk mitigation in supply chains is another important factor in 2015, Ahlburn noted. Congestion at major West Coast seaports and the impending truck driver shortage has supply chain executives seeking alternative strategies.
“To avoid interruptions, they are moving discretionary shipments to East Coast ports,” he said.
Link to article: Industrial Outlook