The industrial property sector is posting continuous gains, joining in on the commercial real estate recovery with low vacancy rates and rising rents.
According to preliminary second quarter numbers from real estate services firm JLL, the national industrial vacancy rate dropped to 7.4 percent, a level not seen since before the downturn. Rents are increasing in all markets, ranging from a reported 2.7 percent uptick in the Midwest to growth of more than 7 percent along the West Coast. Net absorption totaled about 48.5 million sq. ft. in the second quarter, up more than 30 percent from a year ago, according to JLL figures.
Craig Myer, president of JLL’s industrial brokerage division, says with things going so well, there are many people looking for the other shoe to drop, such as a rise in interest rates or a drop in consumer confidence, but he doesn’t see these factors affecting industrial investment.
“I feel that signs are fairly good this year that we’ll continue to hit strong numbers in occupancy and rents,” he says. “We’re anticipating by year-end a national vacancy rate of about 7 percent, a 15-year low, and 185 million sq. ft. of absorption for 2014, a 10 percent increase from 2013.”
Rising tide
While both the job market and housing prices have improved slower than desired, demand for industrial space, led in part by e-commerce needs and a rise in imports/exports, continues to increase. One reason is that developers are showing far more discipline than during the prior cycle, Myers says. About 43.1 percent of the total 121.3 million sq. ft. of industrial space now under construction is pre-leased, and the 135 million sq. ft. expected to be completed this year is far below the 180 million sq. ft. to 200 million sq. ft. completed between 2004 and 2007, Myers notes.
“The two markets where supply is largest, Texas and Southern California, [are] also where there is the most demand, so I don’t see a threat of overbuilding yet,” he adds. “Vacancy is at about 5 percent in Texas markets, and California markets are seeing high absorption rates, such as 9 million sq. ft. this year in the Inland Empire market, and 17 million sq. ft. for Southern California as a whole.”
One new trend, according to Myers, is that demand is heating up for smaller spaces, notably those between 100,000 sq. ft. and 249,999 sq. ft. Since this segment of the market generally appeals to small private distributors, who are more susceptible to fluctuations in the economy, more activity means more confidence among end users, Myer says.
Joe Trinkle, senior vice president and regional director with Liberty Property Trust, an industrial/office REIT based in Houston, agrees that multitenant spaces from 50,000 sq. ft. to 200,000 sq. ft. have been in demand recently, as land to develop buildings of that size is hard to find. Trinkle says users need to be located close to urban cores and land in those areas is more difficult to find and more expensive.
“Of the 25 markets we cover, it’s getting very hard to find multitenant space in these buildings around 400,000 sq. ft.,” he notes. “Pricing is definitely in favor of landlords. Development of multitenant space is a great way today to achieve a higher return, more so than constructing a big-box property. Yields on big-box development projects are generally tighter due to the rapid rise in supply.”
Trinkle says his firm is concentrating on development rather than acquisition because of the increased competition between investors. There is a lot of capital looking for industrial space and not nearly enough available product to match the demand, he notes.
“Acquisition yields for class-A industrial projects are at historic lows, with pricing at an all-time high. Given this current state of the acquisition markets, we are focusing our investment dollars on value-add opportunities where we get to put our company’s expertise to work in development/re-development in order to achieve higher yields for our shareholders,” Trinkle says.
