Low Vacancy, Robust Demand for Industrial Sector

The industrial sector’s sound fundamentals continue as record-low or near-record-low vacancy rates and robust demand place upward pressure on rental rates, reported Avison Young, Toronto.

“The industrial property sector’s metrics continue to impress the market as occupiers and investors alike are drawn to the sector’s stability,” said Avison Young Chair and CEO Mark Rose.

Rose noted though traditional manufacturing operations remain part of the industrial fabric, surging demand for online shopping provides “immense opportunities” in industrial plant, distribution and warehouse assets as supply chains become increasingly complex. “An increasing urban population base also means feeding the unquenchable demand of a fickle and growing consumer market that demands cost-effective, same-day delivery options,” he said.

But Rose said development costs are also increasing due to dwindling land supply in some markets. “In increasingly land-constrained markets, developers are being forced to think outside the traditional warehouse footprint and are even contemplating multi-story warehouses,” he said.

Avison Young found “landlord-favorable” conditions persist in U.S. industrial real estate. Overall vacancy averaged 5.3 percent, down from 5.9 percent one year ago. Leasing fundamentals demonstrated strength in most markets and some markets saw supply shortages, resulting in rental rates growing precipitously.

Avison Young said 17 of the 41 markets in the 11.5-billion-square-foot U.S. industrial market posted below-average vacancy in the first quarter. San Mateo, Calif. saw the lowest rates in the country–just 1.8 percent–followed by Orange County, Calif. at 2 percent and Miami at 2.8 percent.

The U.S. absorbed 232 million square feet of industrial space during the 12 months ending March 31–up 5 percent over the previous 12-month period, Avison Young reported. Six markets gained 10 or more million square feet or more of occupancy: Dallas (27 million square feet), Los Angeles (26 million square feet), Atlanta (18 million square feet), Chicago (17 million square feet), Detroit (14 million square feet) and New Jersey (10 million square feet).

The overall average asking triple-net rent increased $0.44 year-over-year to end the first quarter to $6.97 per square foot, the report said. San Francisco led with a $19 per square foot average rent, followed by San Mateo at $14.28 per square foot and San Diego at $12.24 per square foot.

“Certainly, we’ve seen no slowdown in leasing activity since this time last year and market indicators continued to improve broadly across the U.S.,” said Avison Young U.S. Operations President Earl Webb. He noted that even markets such as Houston that suffered in 2016 due to volatile energy prices reported occupancy gains in the first quarter.

Webb said the next cycle for the industrial market “could be interesting” as data centers, technology and distribution drive vacancy to new lows and functionally obsolete buildings are converted to other uses. “Lack of available supply, the emphasis on the last mile in the supply chain, higher clear heights and land constraints are widespread and common issues,” he said.