Industrial real estate is poised for a spike in demand, development and delivery, according to research by Jones Lang LaSalle. Industrial markets nationwide have been recovering for more than four full years, with 15 consecutive quarters of positive net absorption. Last year marked a five-year high, with 168 million square feet of net absorption, and, with current forecasts, this figure could top 180 million square feet in 2014. So, what’s behind this momentum?
“2014 is starting off with high demand from e-commerce and other users who are in the market for large, sophisticated space, and lots of it,” said Craig Meyer, president of industrial brokerage at JLL. “This will make 2014 the ‘year of the distribution center.’ Modern space with proximity to population centers and a robust logistics infrastructure will dominate the industrial real estate sector in 2014.”
JLL anticipates the overall national vacancy rate will settle at a cyclical low of 7.5 percent in 2014. Here are four trends driving this momentum:
1. Demand is spreading into secondary markets: Tenant requirements for large, modern warehouse space to accommodate evolved distribution strategies and material handling processes outweighs supply in prime distribution hubs such as Los Angeles, Chicago and New Jersey. As a result, development will spill into markets with land ready for new construction like Phoenix and Indianapolis. Demand is already red hot in traditional distribution corridors, especially the Inland Empire, Dallas and Philadelphia/Harrisburg.
2. Build-to-suits are the new spec: In 2013 half of all U.S. construction began with pre-leases in place. Underwriting criteria for big box space made true speculative construction difficult and many developers sought pre-commitments prior to ground breaking. This means today’s build-to-suits are less about special purpose buildings, or design-build-projects, but are more about kicking off semi-spec buildings.
3. Focus on rail: With the cost of trucking on the rise, developers and investors are focusing on markets with solid intermodal infrastructure in place such as Dallas, Columbus and Memphis. For the seaport markets such as Oakland and Miami there is a push to enhance on- and near-dock rail capabilities; Miami’s new rail system, for example, will give the port access to 74 percent of the U.S. population.
4. Growth driven by ‘clicks’ surpassing ‘bricks’: A staggering 40 percent of big-box industrial requirements are correlated to e-commerce – a sector growing globally by 20 percent each year. As retailers develop new real estate models to support their omni-channel logistics models, they are looking at six primary types of warehouse space, ranging from mega-distribution centers to smaller delivery centers in urban areas. In 2014, we expect to see demand for urban logistics centers to support same-day package delivery.