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Commercial Department: Property TypeCast: April 2014


Property TypeCast

Industrial fundamentals improve at a restrained pace

Reis data for this past fourth quarter indicate occupancy in the warehouse and distribution market was flat as the national vacancy rate remained at 11.6 percent. This brings the total decline in vacancy for 2013 to 50 basis points. The national vacancy rate is now 260 basis points below the cyclical high of 14.2 percent recorded in third-quarter 2010.

Vacancy was unchanged as a result of a decline in demand and an increase in new supply. Net absorption fell to its lowest quarterly level in almost two years. Occupied stock increased 13.8 million square feet during the same period, which is 13.1 percent less than the total observed in this past third quarter and 51.2 percent less than fourth-quarter ’12.

Net Absorption and Vacancy, Source: Reis Inc.

The decline in absorption is surprising given that new construction, which helps boost absorption when it comes online preleased, was at its highest level since this past year. More than 10.6 million square feet of warehouse/distribution space was completed in fourth-quarter ’13, up from 8.8 million square feet in third-quarter ’13. This brings total new supply for 2013 to 34.7 million square feet, an increase of 50.4 percent from 2012. Asking and effective rents grew 0.4 percent and 0.5 percent, respectively, in this past fourth quarter, on par with increases from the previous quarter. Market conditions remain sufficiently stable to allow owners to slowly reduce the value of concession packages, but demand is not yet robust enough to reduce these packages in any meaningful fashion.

Heightened demand for high-quality, big-box properties is reflected in this past year’s metro-level results. Annual rent growth for the nation in 2013 was 1.6 percent, with 18 (out of a total of 47) individual metros recording rent growth higher than that level. This group was dominated by metros with high concentrations of big box warehouse/distribution space.

Warehouse/distribution investment environment

Warehouse and distribution properties remain a popular target for investment by domestic and international investors. Late this past year, Norway’s Norges Bank formed a $1 billion joint venture with industrial real estate investment trust Prologis with the objective of acquiring 12.8 million square feet of industrial space in nine markets across the country. Investors from Canada and South Korea also have been particularly active in acquiring U.S. industrial assets.

With the market for high-quality space being tight, institutional investors have become particularly interested in development as a way to capitalize on the industrial market’s recovery. By choosing to invest in development instead of existing properties, investors are able to offer more functional space to e-commerce and logistics companies, the users projected to be a dominant source of demand over the next several years.

Flex/research and development market

The vacancy rate in the flex/research and development (R&D) market declined 10 basis points to 13.6 percent in this past fourth quarter, on par with third-quarter ’13. The pace of vacancy compression was static despite a more modest rate of net absorption for flex/R&D space. Occupied stock increased 1.6 million square feet in this past fourth quarter, down 33.9 percent from this past third quarter and 52.1 percent from one year ago. Construction was also down from this past third quarter, as 382,000 square feet of space opened its doors, 26.7 percent below this third quarter. Asking and effective rents grew 0.2 percent and 0.3 percent, respectively, in line with this past third quarter’s growth. On an annual basis, asking and effective rents grew 0.7 percent and 0.8 percent, respectively.

Although fundamentals continue to improve, the gains in occupancy and rents remain minimal. Moreover, the flex/R&D subtype does not boast the underlying drivers of demand that make the warehouse/distribution segment comparatively attractive in the near- to mid-term despite recent softness in demand. Flex/R&D properties continue to be handicapped by especially constrained employment growth among small and midsized businesses. 


Recent economic data indicate a moderately healthy trajectory for the U.S. economy, providing hope that this past fourth quarter’s gross domestic product growth will translate into an accelerating recovery this year. We expect the pace of recovery in the warehouse/distribution market to quicken this year. The segment of the market composed of obsolescent buildings will limit the aggregate gains in occupancy at a national level. Reis forecasts the vacancy rate will fall by another 50 basis points in 2014 to a year-end average of 11.1 percent. Metros that boast sizable inventories of large and functionally competitive space will continue to outperform and drive rent growth across the country. Reis expects asking and effective rents to increase 2.3 percent and 2.8 percent, respectively, in 2014.

Should the projected rate of economic growth materialize in 2014, we would expect to see an uptick in the performance of smaller properties as small and midsized businesses begin to share in the employment gains that have mostly gone to larger businesses since the onset of the recovery. It is likely that the flex/R&D market will continue to lag behind the warehouse/distribution market, however. Occupancy gains for both subtypes will be similar this year, but flex/R&D asking and effective rents likely will grow 1.5 percent and 2.2 percent, respectively, trailing their industrial counterparts.

Edward Son, senior analyst for Reis’s economics department, contributed to this article.


Victor Calanog is chief economist and senior vice president for research at Reis Inc. ( He writes a monthly column on property types for Scotsman Guide. He and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at

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