Strong market conditions and demand for corporate distribution space have fueled a significant wave of speculative industrial development in the Midwest and across the United States. The new supply pipeline will take 12 to 18 months to achieve leasing and sales status, however; leaving investors without adequate supply to meet demand in the short-term. This environment will lead to 3 to 7 percent price increases for industrial assets in many markets going into 2015, according to a new report by Avison Young‘s National Industrial Capital Markets Team.
The October 2014 Speculative Construction Report is based on an analysis of Co-Star national statistics during the pre-recession period (2005 to 2007) and post-recession period (2011 to mid-year 2014). According to Erik Foster, an Avison Young Principal and the team’s practice leader, sales velocity was as strong in the post-recession period as it was during the pre-recession period, with approximately 1.4 billion square feet of sales in each period. Pricing per square foot, however, is down by approximately 7.5 percent, justifying continued investment activity in the sector, Foster said.
Among the other findings are:
• There currently is 94.6 million square feet of speculative industrial construction underway in the top 30 markets nationally; • A 12 to 18 months or longer construction lifecycle—from ground breaking to significant leasing to sale—will not immediately improve the supply side for investors; • Pricing for industrial assets is expected to rise by 3 percent in many U.S. markets and up to 7 to 10 percent in gateway markets and those that have limited land for development, such as New Jersey, Los Angeles, Miami, and Seattle; • Chicago had the top sales volume per square foot for the pre-recession period (200 MSF) and post-recession period (170.2 MSF).
The recovery is well underway in the industrial market nationally, but many individual markets still lag behind in construction when compared with the pre-recession period. A snapshots of Midwest markets include:
Chicago The largest single industrial market, Chicago, lags significantly behind its pre-recession levels. Chicago built over 56 million square feet pre-recession; to date it has only constructed 17 million, and has 7.7 million in the construction pipeline. When combining these two data points, Chicago still lags behind its pre-construction levels by almost 56 percent; the “city that works” has a way to go to get back to its peak levels of construction.
Columbus Investment activity has been strong in this market, despite prevalent real estate tax abatement that keeps rents in a narrow range and a lack of significant long term growth. Post-recession sales per square foot were 46.4 MSF, an increase of about 10 percent from the pre-recession level of 4.26 MSF. This represents over 18 percent of total inventory in the post-recession period. The central U.S. location, good highway logistics, and the logistics friendly Rickenbacker Airport, create a very dynamic industrial market.
Indianapolis Indianapolis is a leading industrial market and the home of many regional and national air freight and logistics users, including one of the largest regional FedEx hubs in the country. Indianapolis traded 13.8 percent of its inventory in the past three years, compared to 7.6 percent of its inventory pre-recession. Many investors are bullish on this market, as shown by sales volume of $977 million pre-recession and $1.59 billion post-recession.
Among the most active markets for current speculative construction are:
• Dallas/Ft. Worth, 14.8 MSF • Inland Empire, 12.3 MSF • Philadelphia, 8.3 MSF • Chicago, 7.7 MSF • Northern New Jersey, 5.9 MSF • Houston, 4.8 MSF • Atlanta, 4.8 MSF • Columbus, 3.2 MSF • Memphis, 3.2 MSF • Phoenix, 2.9 MSF • Indianapolis, 2.4 MSF