INDUSTRIAL MARKET FINDS ANOTHER GEAR
For owners and developers of industrial real estate, the third quarter of 2016 was cause for celebration. Just when the experts were starting to wonder about the market getting long in the tooth, it took off again. Net absorption was sharply higher, rent growth was strong, vacancy declined and new deliveries were way up. What makes it even more remarkable is the fact that US and global economic growth is anemic and concerns over a real estate correction are spreading. Major US corporations have reported declining earnings for six straight quarters, and central banks across both oceans are printing money and experimenting with negative interest rates to keep their economies from slipping into recession. Our own central bankers have repeatedly threatened to tighten up on their cheap money policy by raising interest rates, but that has been nothing but talk since they made a single rate hike late last year. Domestic GDP growth has slowed substantially in the past year. But, despite all of it, the industrial market just keeps on exceeding expectations quarter after quarter.
If you’re a tenant, owner/user buyer or investor, you are having a tough go of it. With vacancy declining in almost every primary and secondary market, quality space offered for lease is getting tougher to find, and many tenants are forced to settle for older properties, many with elements of functional obsolescence. For those tenants fortunate enough to secure first generation space, rates are up and landlords are demanding longer terms and stronger credit.
Owner/user buyers are frustrated in every market we track. Property values have skyrocketed and the supply has dwindled to zero in some markets. Still, they keep hunting for the rare opportunity to buy with as little as 10% down with long term loans with fixed interest rates in the low 4% range. Many markets have recorded double-digit appreciation for owner/user buildings the past three or four years. Yet, demand keeps moving higher.
For investor buyers, the odds for successful acquisitions are not much better. Competition for industrial investment property is fierce and trades are being made above asking prices at cap rates running as low as 4%.
Even secondary markets are experiencing a huge imbalance of supply and demand. All industrial product types are in high demand. The institutional players are focused on big distribution buildings occupied by strong credit tenants. They also like multi-tenant business parks, but have to compete with local and regional players for those assets. Add value deals are also in play. Those deals are often the target of developers who are having their own troubles securing quality sites for ground-up development, as land becomes more expensive, scarce and harder to get entitled. So, with all that in mind, let’s take a look at the numbers for Q3.
Net absorption, the key driver that makes it all go, was way up in Q3. Over 112 million square feet of positive net absorption was recorded nationwide. That is an increase of 37% over Q2’s total and the biggest quarterly gain in net occupancy in years. E-commerce players, the big shippers and 3PL operators are the biggest contributors, along with major retailers. The big push for “Last Mile” locations is making a difference in markets big and small. Amazon.com has been opening multiple major fulfillment centers each quarter, with many of them near or over 1 million square feet. Walmart is also making a push to do the same, as the world’s largest retailer ramps up to compete with Amazon, the goliath of the e-commerce movement. Without the e-commerce boom, the market would have a very different look and feel. But, the sector may be at just the beginning of its expansion phase, as online sales are still only a small fraction of overall retail sales across the country.
New deliveries for both speculative and build-to-suit projects for Q3 reached 81.5 million square feet in 475 buildings. That is a 48% increase over the previous quarter and the highest total in the past year. That brings total US industrial property inventory up to 21.85 billion square feet. As the quarter ended, another 234.4 million square feet was still in the construction pipeline. Development activity is far from evenly distributed. Infill markets like Los Angeles and Long Island New York, have virtually no construction, while land rich markets like Dallas, Houston, Atlanta, Philadelphia, Chicago and Southern California’s Inland Empire have up to 20 million square feet underway at the same time.
A good balance between spec and build-to-suit construction has helped keep market metrics in balance. New deliveries are running just short of net absorption, which bodes well for continued equilibrium in most markets around the country. At this time, no primary or secondary market in the US is considered overbuilt. That gives developers the confidence to keep on building without fear of being overextended if the market finally does cool off. In the markets with high levels of speculative construction, tenants are able to expand quickly if needed. They may have to pay more, but they continue to show a willingness to do so, as long as they get space that helps improve efficiency.
For the past two quarters we reported that a disproportionate amount of market activity was concentrated in big deals by big tenants in big buildings. That didn’t change much in Q3. The warehouse sector accounted for 104 million of the 112 million square feet of net absorption recorded in Q3. Most of that was in bulk distribution deals. Think Amazon. However, that doesn’t mean every big deal is a big e-commerce player. The biggest building under construction right now is a manufacturing plant for Volvo in Charleston, South Carolina.
If you’re a tenant, owner/user buyer or investor, you are having a tough go of it. With vacancy declining in almost every primary and secondary market, quality space offered for lease is getting tougher to find, and many tenants are forced to settle for older properties, many with elements of functional obsolescence. For those tenants fortunate enough to secure first generation space, rates are up and landlords are demanding longer terms and stronger credit.
Owner/user buyers are frustrated in every market we track. Property values have skyrocketed and the supply has dwindled to zero in some markets. Still, they keep hunting for the rare opportunity to buy with as little as 10% down with long term loans with fixed interest rates in the low 4% range. Many markets have recorded double-digit appreciation for owner/user buildings the past three or four years. Yet, demand keeps moving higher.
For investor buyers, the odds for successful acquisitions are not much better. Competition for industrial investment property is fierce and trades are being made above asking prices at cap rates running as low as 4%.
Even secondary markets are experiencing a huge imbalance of supply and demand. All industrial product types are in high demand. The institutional players are focused on big distribution buildings occupied by strong credit tenants. They also like multi-tenant business parks, but have to compete with local and regional players for those assets. Add value deals are also in play. Those deals are often the target of developers who are having their own troubles securing quality sites for ground-up development, as land becomes more expensive, scarce and harder to get entitled. So, with all that in mind, let’s take a look at the numbers for Q3.
Net absorption, the key driver that makes it all go, was way up in Q3. Over 112 million square feet of positive net absorption was recorded nationwide. That is an increase of 37% over Q2’s total and the biggest quarterly gain in net occupancy in years. E-commerce players, the big shippers and 3PL operators are the biggest contributors, along with major retailers. The big push for “Last Mile” locations is making a difference in markets big and small. Amazon.com has been opening multiple major fulfillment centers each quarter, with many of them near or over 1 million square feet. Walmart is also making a push to do the same, as the world’s largest retailer ramps up to compete with Amazon, the goliath of the e-commerce movement. Without the e-commerce boom, the market would have a very different look and feel. But, the sector may be at just the beginning of its expansion phase, as online sales are still only a small fraction of overall retail sales across the country.
New deliveries for both speculative and build-to-suit projects for Q3 reached 81.5 million square feet in 475 buildings. That is a 48% increase over the previous quarter and the highest total in the past year. That brings total US industrial property inventory up to 21.85 billion square feet. As the quarter ended, another 234.4 million square feet was still in the construction pipeline. Development activity is far from evenly distributed. Infill markets like Los Angeles and Long Island New York, have virtually no construction, while land rich markets like Dallas, Houston, Atlanta, Philadelphia, Chicago and Southern California’s Inland Empire have up to 20 million square feet underway at the same time.
A good balance between spec and build-to-suit construction has helped keep market metrics in balance. New deliveries are running just short of net absorption, which bodes well for continued equilibrium in most markets around the country. At this time, no primary or secondary market in the US is considered overbuilt. That gives developers the confidence to keep on building without fear of being overextended if the market finally does cool off. In the markets with high levels of speculative construction, tenants are able to expand quickly if needed. They may have to pay more, but they continue to show a willingness to do so, as long as they get space that helps improve efficiency.
For the past two quarters we reported that a disproportionate amount of market activity was concentrated in big deals by big tenants in big buildings. That didn’t change much in Q3. The warehouse sector accounted for 104 million of the 112 million square feet of net absorption recorded in Q3. Most of that was in bulk distribution deals. Think Amazon. However, that doesn’t mean every big deal is a big e-commerce player. The biggest building under construction right now is a manufacturing plant for Volvo in Charleston, South Carolina.
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