Tom Franchini, Colliers International
The industrial market had a notable year in 2014. Vacancy declined 270 basis points from the first quarter of 2014 where nearly 1 million square feet of space was absorbed. It has been more than seven years since absorption has registered similar figures.
The primary factor driving last year’s success was a handful of large deals with more than 50,000 square feet. The supply of larger, quality spaces was steadily leased up throughout the year. These accounted for 54 percent, or 522,000 square feet, of absorbed space.
Market velocity slowed down during the fourth quarter, driven by a lack of quality inventory. Absorption registered a positive 103,000 square feet, and was the lowest quarterly level of 2014. The centrally located North I-25 submarket outshined all other submarkets. In the biggest deal of the quarter, Flagship Foods occupied nearly 79,000 square feet of space in the North I-25 submarket. There were also nine other spaces occupied in this submarket that contributed another 60,000 square feet of absorption.
A developing concern for 2015 is the significant amount of new available space being brought to market. Although still occupied, a total of 244,000 square feet of new space was added to the inventory and actively competing. The majority of these new availabilities are occurring in newer properties with more desirable attributes. Much older and more functionally obsolete spaces were the common theme for spaces being brought to market in 2014. This drove asking rates lower since landlords had to price listings competitively to attract interest.
This increase in new available space is also poised to drive the vacancy rate upward over the next few quarters. Overall space demand will likely decline until a meaningful uptick in new housing commences. The volume of larger deals may also drop when compared to 2014’s level.
The trend to repurpose functionally obsolete properties should remain a viable strategy in 2015. Non-traditional users of industrial space like fitness centers, breweries, religious institutions and education facilities are expected to remain vibrant throughout the year. Attractive pricing on older properties is helping to facilitate this trend.
New speculative construction starts should remain dormant throughout the first half of 2015. Hindering speculative starts will be the ability to compete with higher asking for new construction, compared to asking rates for existing inventory. Asking rates in many cases are at least 25 percent higher in new projects.
The new construction that does move forward should occur in build-to-suit or user-developed projects for larger buildings with more than 20,000 square feet. Land prices are likely to remain at depressed levels, which will help make with these types of projects possible.
By Tom Franchini, Senior Associate Broker, Colliers International. This story originally appeared in the May 2015 issue of Western Real Estate Business magazine.