The U.S. economy remains stalled in a low gear, impacted by the uncertainties surrounding domestic financial and Euro Zone debt challenges. Yet in the face of the resulting slow growth, demand for industrial real estate continues to rise nationally, reflected in healthy leasing, declining vacancy rates and modest rent growth in most markets.
Cushman & Wakefield expect the issues holding the economy in check to influence industrial’s momentum for at least another year. Once economic growth starts to accelerate in 2014 and 2015, the country will be well positioned to experience a period of strong expansion, which will further fuel industrial progress. At that point, more businesses will move forward with the manufacturing and distribution projects — which they currently may be postponing — to support growth and service level requirements in an increasingly consumer demand-led economy.
Strengthening Fundamental
In the meantime, national industrial real estate fundamentals continue to strengthen. The U.S. industrial sector has now seen three consecutive years of occupancy gains, ending 2012 with 151.5 million square feet of positive absorption. Demand is rising, particularly around the ports of the East and West coasts, and is strongest in Greater Los Angeles, Miami, and New York-New Jersey. The growth of e-commerce is also having a significant effect, creating a trend toward bigger and more efficient distribution centers in prime locations that can help meet increasing demands for shorter service delivery windows.
The national vacancy rate dropped 130 basis points during 2012, ending the year at 8.7 percent — its lowest rate in four years. More than half of the 74 markets tracked by Cushman & Wakefield and its Alliance Partners reported year-over-year vacancy rate declines.
- With vacancies currently at 4.6 and 5.2 percent, respectively, Greater Los Angeles and Orange County in California were reporting the lowest rates among major markets in the nation at year-end 2012.
- Helped by a booming auto industry and a significant uptick in leasing and owner-user sales activity, Nashville’s overall vacancy rate dropped 370 basis points to end the year at 8.9 percent.
- In the Midwest, Detroit saw the largest drop in vacancy; its current rate of 13.0 percent is 350 basis points lower year-over-year.
- On the East Coast, Central New Jersey’s overall vacancy has fallen 140 basis points, to 8.2 percent.
After a 20.5 percent increase in leasing activity in 2011, volume remained relatively flat in 2012, totaling 415.5 million square feet. Greater Los Angeles continued to lead the nation with 37.3 million square feet leased, followed by Chicago (32.2 million square feet), Dallas/Fort Worth (25.4 million square feet) and the Inland Empire (25.3 million square feet).
Rents are on the rise. For the five-year period of 2011-2016, Cushman & Wakefield projects that rents will have risen by 54 percent in California’s Silicon Valley, 34 percent in the San Francisco Peninsula, 30 percent in Los Angeles, 28 percent in the Miami market, and 25 percent in Houston.
The warehouse/distribution category has been seeing increased build-to-suit and speculative construction, fueled by demand for quality Big Box space in major logistics markets. In 2012, 58 million square feet of new supply was added to the inventory. Nearly 58 percent of that was built for large tenants like Amazon.com, Unilever, Kohl’s, Georgia Pacific and the Home Depot. The Pennsylvania I-81/I-78 Distribution Corridor was home to both the largest build-to-suit (1.4 million square feet in Newville for Unilever) and speculative (1.2 million square feet in Bethlehem) projects.
An additional 57.8 million square feet is currently under construction nationwide, with California’s Inland Empire leading the nation with 6.8 million square feet, followed by Dallas/Fort Worth with 5.8 million square feet. Redevelopment also is gaining momentum across the country. Land constraints and the obsolescence of older facilities should spur more redevelopment and the retrofitting of existing facilities.
Industrial sales picked up pace in 2012 — particularly in the second half of the year — with 253.3 million square feet of investor trades and 112.9 million square feet of user acquisitions. Chicago led the nation in sales volume, with 21.3 million square feet, followed by Greater Los Angeles, with 19.2 million square feet.
Sales of industrial properties totaled $36.9 billion in 2012, marking a 4.2 percent year-over-year increase in total dollar value, according to Real Capital Analytics. This included $13.5 billion during the fourth quarter alone, representing the highest quarterly total since the third quarter of 2007. Prices improved moderately, increasing by six percent with average cap rates declining by just ten basis points from 2011.
The Future of Manufacturing and Flex Space
In the manufacturing sector, following a slight contraction in jobs through most of 2012, employment rose by 25,000 in December to register a factory employment increase of 180,000 for the year. This is good news, as manufacturing accounts for 12 percent of the U.S. GDP, and innovation and technology remain crucial in the long term for a productivity-driven industry.
According to Cushman & Wakefield’s 2013-2016 Industrial Forecast Report; however, a shortage of skilled workers threatens to slow manufacturing growth in 2013. That said, an emphasis on advanced training and development support in major manufacturing hubs, particularly in the Midwest and Northeast, are expected to stabilize growth in those areas. Major markets like Chicago, Boston, Philadelphia and New Jersey are poised for manufacturing expansion.
Cushman & Wakefield also projects that demand for flex space, which has noticeably decreased in recent years, is poised to grow significantly by 2015. Until then, however, demand is expected to remain weak, with the overall flex market projected to absorb an average of six million square feet through 2014. And, for the rest of the decade, such markets as California’s Silicon Valley and Orange County, along with Denver, Dallas, Portland and Phoenix are expected to cumulatively account for nearly half of all flex space absorption. We also expect that demand for data centers, call centers and high-tech lab space will grow as the economy rebounds.
The fact remains that there is considerable pent-up consumer and business demand in our country and it is poised to fuel an economic rebound that has been a long time coming. That the national industrial real estate market has continued to strengthen despite the economic uncertainty provides a great deal of optimism for 2014 and beyond.
