By staff reports
NEW YORK — With vacancy rates and speculative construction back to pre-recession levels, the U.S. industrial sector at mid-year 2014 continues to lead the country’s commercial real estate recovery, according to Cushman & Wakefield. The commercial real estate services firm released its second-quarter industrial market analysis, which also shows strong occupancy gains and rising rental rates in the face of diminishing big-box supply.
“With demand for goods from consumers and businesses rising at a healthy pace, e-commerce sales rising by 15 percent a quarter, and manufacturing production and shipments increasing, the national industrial market has, indeed, entered a time of significant growth and progress,” says John Morris, leader of industrial services for the Americas at Cushman & Wakefield.
The U.S. industrial vacancy rate continued to compress during the second quarter to 7.2 percent, 80 basis points lower than one year ago and the lowest level since the first quarter of 2008. This is a significant departure from the recent high of 10.8 percent posted during the first quarter of 2010. Two California markets currently have the lowest industrial vacancies in the nation: the San Francisco Peninsula (3.7 percent) and Orange County (3.9 percent).
Net demand remained strong during the second quarter and is on track to surpass last year’s total, with 62.5 million square feet of net industrial occupancy gains at mid-year, according to Cushman & Wakefield’s research. Atlanta is leading the nation with 8.9 million square feet of space absorbed to date in 2014, followed by California’s Inland Empire with 7.5 million square feet.
Only seven of the 38 markets tracked by Cushman & Wakefield posted a net loss in occupancy at mid-year. The report is quick to point out that for some of these markets a net loss in occupancy is as much about an increase in supply as it is about any decline in demand.
Average asking rents continue to trend upward in most markets. The national average direct asking rent, currently at $6.09 per square foot, is up 5.2 percent from one year ago and 11.7 percent higher than the recent low of $5.45 per square foot posted during the first quarter of 2011.
Due to a limited supply, though, leasing activity is off to a slower start for the industry in 2014.
“Less available supply, especially in the highly competitive industrial big-box market, has prompted a slow-down in leasing activity so far in 2014,” says Morris.
Totaling 161.5 million square feet, tenant commitments are down 6 percent year-over-year. Only 13 out of 38 markets posted an increase in leasing activity, but eight markets recorded double-digit gains-year-over-year, led by Silicon Valley (up 30.7 percent), Central New Jersey (up 24.8 percent) and Philadelphia (up 26.2 percent). According to Cushman & Wakefield’s industrial group, its leasing activity is up more than 25 percent this year.
“We would attribute our gains to strong client relationships, talented market specialists and a knowledge-based platform that is thoughtful and innovative,” says Morris.
Despite limited leasing activity, increased construction — both build-to-suit and speculative — is bringing more industrial supply on line, according to Morris.
“Currently, 98.4 million square feet of new product is under development. Virtually all of the top markets are seeing construction pipelines return to pre-recession construction levels,” says Morris.
In terms of new construction, Dallas/Fort Worth and Inland Empire top the nation, with 16 million square feet and 13.4 million square feet under development, respectively. As a market, Dallas absorbed more than 15 million square feet in 2013, and is set to add more than 20 million square feet in construction by the end of 2014.
At mid-year, build-to-suit industrial construction deliveries totaled 21.4 million square feet, with an additional 30.4 million square feet anticipated by year’s end. In terms of spec construction, 67.3 million square feet of new product is expected to be delivered this year. According to Cushman & Wakefield, this is the highest level of new spec construction since 2008, although it remains well below that year’s total of 112.4 million square feet.
“By the end of the year, new industrial construction will total 119 million square feet — more than double last year’s total and the highest since 2008, when 135.9 million square feet of inventory was added,” says Morris. “However, with demand from both traditional and online retailers likely to remain strong over the next few years, we do not see supply catching up with demand anytime soon.”