Wednesday, March 23, 2016

US Industrial CRE Demand: Strongest Ever?

by Brian Rogal, Globest.com
The US economy may be growing slowly, but the industrial market just finished one of its best years ever, and 2016 is already shaping up to be another year of declining vacancy, rising rents and robust levels of new construction.

“The industrial real estate market has fully recovered from the shock of the financial collapse. The market has now experienced five straight years of positive absorption."

Speculative development has been slow to return, however, which Rosenberg attributes to “the freshness of the losses incurred from 2008 to 2010.” Industrial developers added about 49.5 million square feet of space to the market in the 4th quarter, much of it through build-to-suit projects. But with vacancy rates hitting historic lows in many regions, more speculative projects will start going vertical in 2016.

Overall vacancy in the US sank to just 6.4% by the end of 2015, the lowest rate seen in ten years, according to Colliers’ statistics. And absorption hit 252.3 million square feet for the year, more than the 201.9 million square feet of space added by developers, and besting the previous year, when users absorbed 225 million square feet.  

The tightening market has allowed landlords to push up rents significantly. Rents bottomed out at $4.53 in the third quarter of 2011, but have now risen for 17 straight quarters. Compared to last year, rents increased 6.2% to $5.39 per square foot. That is still below the peak of $5.63 reached in the second quarter of 2008, so the unbroken string of increases may continue for some time.  

Much of these gains, however, are due to the robust demand from only six metro areas. Los Angeles-Inland Valley, Dallas-Ft. Worth, Chicago, Atlanta, Philadelphia-Lehigh Valley and Detroit accounted for 34.1% of all US industrial demand in 2015. It’s not surprising that the first five are key players in the US distribution market, the most robust sector in the country.

Detroit, which accounted for 3.6% of US industrial demand, might be the only metro area on that list that surprises anyone. But “the car industry has been very healthy,” Rosenberg says, and the region is filled with auto suppliers that need to expand. And the fact that many big industry players don’t operate in the Detroit area creates opportunities for others. “Because it’s ignored by Prologis and groups like that, private investors can make a lot of money there.”

And from what Rosenberg has seen of the market this year, he expects 2016 will be another great year, barring any unforeseen shocks. “The demand is just the strongest we’ve ever seen.” If anything has changed in the last six months, it’s that vacancies have reached such a low point that “companies are fighting each other for space.” That’s obviously not true for all markets, he adds, but the vacancy rate in Los Angeles, just to pick out one example, has sunk to an incredible 1.6%. Therefore, for the rest of the year, “the spec spigot should be full-on.”
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