Construction Pipeline Ramps Up to Meet Strengthening Demand
Robust absorption, declining vacancies and rising rental rates reflect continued progress for the U.S. industrial real estate market through the first quarter of 2014, according to commercial real estate services firm Cushman & Wakefield’s latest research findings, released this week. And while tightening supply may have contributed to a slowdown in leasing velocity through January, February and March, the nation’s industrial construction pipeline has ramped up to meet strengthening demand.
“First quarter performance continued the notable progress industrial real estate experienced in 2013,” noted Cushman & Wakefield’s John Morris, leader of Industrial Services for the Americas. “Domestic manufacturing continues to gain traction, driving increased production and shipments, and electronic fulfillment continued to expand. As a result, the economic environment for our sector is the best we have seen in many years.”
In fact, industrial space occupancy gains rose 31 percent year over year, with 30.5 million square feet of absorption, compared to 23.2 square feet in the first quarter of 2013. Atlanta led the nation, with 5.1 million square feet of absorption, followed by the Inland Empire, with 4.6 million square feet. The U.S. overall industrial vacancy rate continued to trend down, ending the quarter at 7.4 percent, 80 basis points lower than one year ago.
“Availabilities are dwindling, especially in the highly competitive big-box market,” Morris noted. “This is holding industrial leasing in check. Only 11 out of the 38 markets tracked by Cushman & Wakefield posted increased activity year-over-year.”
Greater Los Angeles continued to lead the nation in leasing volume, with 7.7 million square feet in activity through March (down 16 percent year over year), followed by Dallas/Fort Worth, with 6.8 million square feet (up 13 percent year over year). Seven markets posted double-digit gains during the first quarter, with Northern New Jersey up 43 percent year over year, and Philadelphia recording a 74 percent increase.
A shortage of top-tier industrial space has placed continued upward pressure on rents. Average asking rates grew in most major markets tracked by Cushman & Wakefield, with the national direct average climbing from $5.73 per square foot to $6.03 per square foot during the past 12 months. Houston led the way with a 10.3 percent year-over-year average rent increase.
“The supply/demand imbalance also continues to fuel construction activity, including both build-to-suit and speculative product,” Morris noted. “Virtually all of the top markets are seeing construction pipelines return to near pre-recession levels.”
Dallas/Fort Worth and California’s Inland Empire are leading the nation in construction, with 16.5 million square feet and 14.8 million square feet of total volume, respectively. In Dallas/Fort Worth, 14.4 million square feet of that total is being built on spec. Of the 85.8 million square feet of total development expected to be completed nationwide by year-end 2014, 51.7 million square feet is speculative.
“Moving forward, we are watching a number of private sector developments that will likely add near-term momentum to the industrial real estate market’s positive trending,” Morris said. “Among them, we anticipate a continuing revival of the housing sector, the activation of pent-up consumer demand and rising export volume. Most importantly, we are beginning to see a shift in business attitudes and a greater willingness to take risk, which will lead to stronger employment growth and increased investments in people and equipment.”
* Indicates change in “percentage points” from prior year (not percent).