Guest post by John Morris, Cushman & Wakefield
The commercial real estate industry today is operating under the broad premise that businesses and consumers in the United States are becoming more willing to spend, invest and take risks. In the industrial sector in particular, improving market fundamentals are providing additional reason for optimism.
Barring any unexpectedly negative influences of sequesters, grand deals and other geo-political issues, pent-up consumer demand for housing, automobiles, appliances and other less durable goods will translate to increased spending in the near term. This, in turn, will create a jump in demand for manufacturing and distribution space through the balance of 2013, into 2014 and beyond.
This anticipated progress will build upon a foundation for recovery that already is gaining momentum. 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.
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.
· Chicago, which recorded 14.9 million square feet of occupancy gains, is currently one of the country’s strongest markets in terms of demand.
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).
A focus on fulfillment
Companies continue to focus their investments in fulfillment – maximizing efficiencies in inventory, service time and delivery – which translates to increased space demand. Related to the pressures on fulfillment, U.S. companies are growing increasingly comfortable with outsourcing logistics. The country has grown into the world’s third-largest 3PL market; today 12 percent of logistics spending is tied to 3PLs, up from 6 percent 15 years ago.
Logically, then, 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, 58.0 million square feet of new supply was added to the inventory. Nearly 58.0 percent of that was built for large tenants like 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. Considering that almost every key market has a vacancy rate of 9.0 percent or lower, we expect that construction will resume on a wider scale soon, even in those regions where it has remained slower until now. Still, volume under construction remains at about 0.5 percent of the total U.S. inventory – a relatively small amount – which will keep absorption healthy again this year.
Underweight portfolios drive investor demand
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 6 percent with average cap rates declining by just 10 basis points from 2011.
Interestingly, at a recent Cushman & Wakefield event, 43 guests involved with acquisitions were asked if they felt they were overweight or underweight in their industrial portfolios compared to their investments in other property types. In their responses, all but one considered themselves underweight in Industrial. With this in mind, we are seeing a significant amount of investment dollars chasing industrial assets early this year.
Many corporations are looking to launch major projects in the spring, before summer – which has increasingly become a time of maintaining, not initiating – arrives. In that respect, we likely will be able to measure 2013’s potential within the next couple of months. For now, the short range view of the industrial sector is quite positive, fueled by pent-up consumer and business demand that is poised to push the economic recovery forward into 2014.
John Morris is leader of industrial services for the Americas in the Chicago office of Cushman & Wakefield.