U.S. Industrial Vacancy Approaches Historic Low After First-Quarter Absorption Gains, Says Cushman & Wakefield

NEW YORK — The U.S. industrial market absorbed 57.8 million square feet of space in the first quarter of 2016, up 9.3 percent from the first quarter a year ago, according to Cushman & Wakefield’s first-quarter industrial report.

This marked 24 consecutive quarters of positive net occupancy gains for the sector, placing the current expansion among the longest on record, as well as among the strongest.

The U.S. industrial market shed more than 182 million square feet of occupancy during the economic downturn, but it has absorbed more than 990 million square feet in the expansion. The national industrial vacancy rate continued to decline in the first quarter, falling by 20 basis points from the prior quarter and 70 basis points from the prior year to 6.1 percent. Industrial vacancy is currently tracking at the lowest level of the past 30 years and is now a full 240 basis points below the 10-year historical average.

Kevin Thorpe, chief economist of Cushman & Wakefield, says the outlook for the industrial sector remains promising, and he expects 2016 to be another year of strong growth.

“Going forward, the demand drivers for industrial remain firmly intact,” says Thorpe. “Much of what drives demand for industrial space links to the U.S. consumer, and by most measures, the consumer is feeling confident and spending. With the U.S. economy now showing signs of shaking off the first-quarter blues and with the U.S. consumer on solid footing, the outlook for industrial demand remains robust. Our forecast calls for 2016 to be another year where net absorption surpasses the 200 million-square-foot mark, and considering all that transpired in the first quarter, we are well on our way.”

U.S. industrial rents increased 3.8 percent in the first quarter compared to a year ago. Industrial rents increased in 68 of 79 markets tracked by Cushman & Wakefield from the first quarter of 2015 to the first quarter of 2016, with more than 20 percent of the country now reporting double-digit gains. In many markets, industrial rents are now either at their historic high or quickly approaching it, and on a national level the rental rate is appreciating for every industrial product type.

John Morris, executive managing director of logistics and industrial services for the Americas at Cushman & Wakefield, also expects continued growth for the industrial sector and notes that fulfillment channel migration to e-commerce is giving rise to a net new user, supporting industrial fundamentals.

“Logistics is becoming a competitive service business focused as much on shipping direct to customers’ homes as shipping to brick-and-mortar
stores,” says Morris. “Increasingly, businesses are doing their own e-commerce, and basic branded companies are trying to guide their businesses more online. The transformation that branded companies are undergoing themselves — developing a direct relationship with consumers — is expected to lead to significant requirements for new industrial space across the country.”

On the development front, 51.7 million square feet of industrial product was delivered in the first quarter with the majority of deliveries coming on line in
major industrial markets and primary inland distribution hubs. Developers continued to break ground on more speculative projects in many markets. In the first quarter, speculative projects under construction totaled 109.9 million square feet, comprising 62.5 percent of the total 175.8 million square feet currently under construction.

“Construction is certainly ramping up, but it remains well below what we observed at the peak of the last cycle,” says Jason Tolliver, Cushman
& Wakefield’s head of industrial research, Americas. “During the period of 2004-2009, we saw the delivery of over 776 million square feet of product. Compare that to this expansion, where from 2010-2016 we’ve witnessed 566 million square feet of deliveries and historic absorption, and it shows that nationally we aren’t overbuilding yet. We believe leasing activity should keep pace with new construction in the majority of markets over the course of 2016.”

In the first quarter of 2016, the top 10 strongest markets in terms of demand for industrial space were Dallas/Fort Worth with 6.8 million square feet of absorption; Central New Jersey with 5.1 million square feet; Chicago with 3.9 million square feet; the Inland Empire with 3.7 million square feet; Atlanta with 3.3 million square feet; Detroit with 2.8 million square feet; the Pennsylvania I-81/I-78 Distribution Corridor with 2.7 million square feet; Philadelphia with 1.5 million square feet; Greater Los Angeles with 1.4 million square feet; and Phoenix with 1.4 million square feet.

Among the tightest markets in terms of overall vacancy included Denver and Greater Los Angeles at 2.2 percent; Orange County at 2.8 percent; San Jose at 3 percent; East Bay at 3.2 percent; Cincinnati at 4.2 percent; Milwaukee and Portland at 4.8 percent; Miami at 4.9 percent; and Detroit at 5 percent.

Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services, global occupier services, investment and asset management, project and development services, tenant representation and valuation and advisory. Cushman & Wakefield has roughly 43,000 employees in more than 60 countries around the world.

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