The U.S. industrial vacancy rate dropped to its lowest level in nearly 14 years during the last months of 2014, marking a year of progress also punctuated by strong leasing totals, impressive occupancy gains and healthy rent growth, according to Cushman & Wakefield. The commercial real estate services firm’s fourth quarter 2014 research findings, released today, reflect the sector’s continued expansion.
“The industrial real estate market expansion has been driven, in part, by the ongoing evolution of demand-driven and information-enabled supply chains, noted Cushman & Wakefield’s John Morris, leader of Industrial Services for the Americas. “Responding to dynamic changes to how people shop, where they work, and how and where they live, new models and new requirements continue to emerge. An improving economy, the expansion of e-commerce and the growth of domestic manufacturing further fueled the rapid advancement we witnessed during the past year. In almost every market, industrial property demand continues to surpass supply.”
The overall industrial vacancy rate ended 2014 at 6.8 percent – the lowest level since the first quarter of 2001. Vacancies dropped 70 basis points year over year and 400 basis points from the recent peak of 10.8 percent in early 2010. Today, four markets boast vacancy rates of under 4.0 percent, including California’s San Francisco Peninsula (3.0 percent) and Greater Los Angeles (3.4 percent); Lakeland, Florida (3.7 percent); and Orange County, California (3.7 percent).
Robust demand resulted in 340.3 million square feet of industrial leasing activity in 2014, a rise of 3.6 percent over 2013. “Leasing reached its highest level since 2005,” Morris noted. “Nineteen of the 38 markets Cushman & Wakefield tracks posted increased activity year-over-year, and 14 markets recorded double-digit gains.”
Among the top performers, Atlanta was up 51.5 percent year over year, while Central New Jersey posted a 21.7 percent increase in industrial leasing activity. Greater Los Angeles posted the most leasing, at 40.0 million square feet, followed by Chicago (35.5 million square feet) and California’s Inland Empire (31.1 million square feet).
This strong demand helped the industrial market achieve positive net absorption for the fifth year in a row. The nation’s 159.1 million square feet of occupancy gains in 2014 was 35.7 percent higher than last year. Inland Empire led with 18.9 million square feet of absorption, followed by Atlanta with 16.1 million square feet and Chicago with 15.7 million square feet. Only three Cushman & Wakefield-tracked industrial markets posted negative absorption in 2014.
“This significant space absorption in the face of historically low supply has resulted in healthy rent growth,” Morris noted. “Average direct asking rent in the U.S. rose 5.5 percent during 2014.” The San Francisco North Bay and Oakland, California, submarkets saw the highest rent growth, at 22.2 and 20.9 percent, respectively.
At year end, 105.1 million square feet of industrial inventory was under construction in the U.S., with 70 million square feet in speculative projects accounting for 66.8 percent of this total. Spec construction also accounted for more than half of new completions in 2014. Dallas/Fort Worth leads the nation in new development, with 16.2 million square feet currently under construction, followed by the Inland Empire with 15.6 million square feet and Atlanta with 15.3 million square feet.
“The industrial market is well positioned to gain further momentum in 2015,” Morris noted. “The battle between major retailers to make optional a ‘last mile’ experience that could be nearly instantaneous for customers will only accelerate in the coming year. Our perspective is that, overall, industrial square feet are replacing some retail space needs in the U.S., now, and for the foreseeable future.”