Scotsman Guide > Commercial > December 2014 > Department

 Enter your e-mail address and password below.

  •  
  •  

Forgot your password? New User? Register Now.

Commercial Department: Property TypeCast: December 2014

 

Property TypeCast

Industrial recovery remains healthy

The recovery in the warehouse and distribution market continued apace in this past third quarter, and despite a drop in quarterly net absorption, demand remained strong. Occupied stock increased by 18.6 million square feet, below the 23 million square feet exhibited in this past second quarter. This is not a sign of weakness, however. Third-quarter net absorption outpaced the rate seen in all of 2013 and this past first quarter. Year-to-date figures further emphasize the current strength in demand — the year-to-date absorption total for 2014 is roughly 10 million square feet more than it was at the same point in 2013.

Net absorption for the quarter benefitted from the growing amount of new space hitting the market. Shrinking availability in the highest-quality warehouse and distribution space is enticing developers to ramp up construction. As such, third-quarter completions totaled 15.8 million square feet, the highest quarterly figure since the recession. Construction activity through the first three quarters of the year amounted to 41.4 million square feet, which is already 10.7 percent more than the annual total for 2013.Warehouse and Distribution Vacancy and Net Absorption; Warehouse and Distribution Effective-Rent Growth. Source: Reis Inc.

Although demand was healthy, rising completion figures limited the decline in vacancy to 10 basis points. The current vacancy level is now at a post-recession low of 11.2 percent. This represents a 50-basis-point decline from one year ago and a 300-basis-point decline from the cyclical high of 14.2 percent in late 2010. We expect vacancy to continue to fall, but any further declines in the near future will be limited given the amount of new space being delivered each quarter.

Warehouse and distribution center asking and effective rents increased 0.6 percent and 0.7 percent, respectively, which is in line with the previous quarter’s results. Annual asking-rent growth held steady at 2.1 percent, while annual effective-rent growth edged up slightly to 2.3 percent. Although not robust, the overall trend in growth is clearly upward. Annual rent growth is at its highest point since the recession.

A number of recent data releases have signaled an improved trajectory for the nation’s economic recovery. Perhaps most importantly, labor-market improvements are beginning to accelerate. This comes as very good news to warehouse and distribution property owners because the health of the U.S. consumer has never been more important to the industrial real estate market.

E-commerce and omni-channel retailing have blurred the line between the traditional definitions of retail and industrial space. Warehouse and distribution space users are no longer the middlemen between manufacturers and storefronts. In a sense, they are the storefronts themselves, delivering goods directly to consumers and thus relying more directly on the consumer than ever.

All is not rosy, however. Overseas economies are slowing down, which poses a risk to industrial markets highly reliant on international trade. Growth in the European Union and Japan remains painfully low, and slowing economic expansion is confounding China’s leaders. At a recent Federal Open Market Committee meeting, weak overseas growth and a strengthening dollar were among the main causes for concern.

Still, Reis expects that strength in the domestic economy will continue to push warehouse and distribution vacancies down and rents up. Vacancy compression will be limited, especially given the acceleration of construction activity. Developers will remain active through 2015, keeping completion levels elevated, but the upward trend in effective rent growth will remain intact. Industrial fundamentals are not improving at a breakneck pace, but the sector’s recovery remains relatively healthy nonetheless. 


 

Victor Calanog is vice president of research and economics at Reis Inc. (www.reisreports.com), 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 victor.calanog@reis.com. Brad Doremus, senior analyst for Reis’ economics department, contributed to this article. Reach him at brad.doremus@reis.com

Fins A Lender Post a Loan
Residential Find a Lender Commercial Find a Lender
Scotsman Guide Digital Magazine
 
 
 
 

 
 

© 2019 Scotsman Guide Media. All Rights Reserved.  Terms of Use  |  Privacy Policy