CALABASAS, CALIF. — The broadening economic growth cycle has accelerated the U.S. industrial sector’s momentum, tightening vacancies across most metros and supporting strong rent growth, says Marcus & Millichap’s midyear industrial research market report. Marcus & Millichap is confident that the strengthening of both the producer and consumer economies should bolster demand across a wide swath of industrial facilities. Total jobs now stand more than 3 million higher than prior to the recession; wage growth has begun to gain traction; and retail sales, though a bit sluggish in the first quarter, appear poised for greater acceleration.
Net absorption for a variety of industrial spaces has steadily improved in tandem with the U.S. economy. Demand for bulk industrial space often recovers first, leaving slack in the small and midsize markets. Internet businesses and retailers are a segment that will reshape the industrial sector in the coming year as businesses compete on speed of delivery, forcing retailers to find warehouse locations proximate to major population centers, according to Marcus & Millichap.
Demand for space has also grown as auto and housing sales have escalated. After reaching a trough in early 2009 and remaining muted through much of the recovery, auto sales are returning to pre-downturn levels. The housing market also appears to have turned a corner, lifting demand for a wide range of housing-related industrial tenants. Combined, Marcus & Millichap expects that these trends will boost local industrial demand, lift investor activity and attract capital at low cap rates. The bull market has begun rippling beyond major port and distribution markets to reach a broad swath of metros.
The report says the headwinds that emerged over the winter months have largely dissipated, with a few notable exceptions. The now-resolved West Coast port labor disputes hampered international trade, while harsh weather in the Northeast restrained consumption. Concurrently, the strength of the dollar raised the cost of U.S. goods internationally and softened domestic demand for American products as consumers favored the relative affordability of imports. Going forward, these challenges are expected to fade as global currencies rally and the U.S. labor market picks up steam.
Taken collectively, the hurdles still facing the world’s largest economy appear formidable, but the report states that they are far outweighed by positive indicators and only serve as fodder for a dovish Federal Open Market Committee to delay rate hikes.
2015 Annual Industrial Forecast
Economy: The economy is expected to add 3.1 million jobs by year-end 2015, lifted by 2.9 percent GDP growth. The trade, transportation and utilities sector, which added the third-largest concentration of new jobs this year, reiterates demand for industrial real estate.
Construction: Approximately 130 million square feet of new supply is anticipated by year-end. Much of the construction is substantially pre-leased, with build-to-suit opportunities found in markets that have functionally obsolete or inadequate supply.
Vacancy: The national vacancy rate will plummet another 70 basis points to a 15-year low of 6.5 percent by year-end as industrial demand absorbs 170 million square feet, surpassing the competitive space delivered to the market.
Rents: Asking rents nationally will increase by an average of 5.3 percent, while concession reductions boost effective rents. Rent and revenue gains in supply constrained, gateway markets will exceed national averages.
The Marcus & Millichap 2015 midyear national industrial report was prepared and edited by Marcus & Millichap Research Services. For more information, visit MarcusMillichap.com.
— Staff Reports