‘Landlord-Favorable’ Industrial Real Estate Conditions
U.S. industrial real estate market conditions remained “landlord-favorable” during the 12 months ending March 31, reported Avison Young, Toronto.
The 12-billion-square-foot U.S. industrial market ended the first quarter with a 5 percent vacancy rate despite “significant” new construction, the North America Industrial Market Report said. E-commerce and last-mile distribution hubs near population centers, data centers and bio-tech facilities remain dominant demand generators.
“Developers are seeking to meet strong tenant demand by creating the most efficient product possible through innovation and technology,” said Avison Young U.S. Operations President Earl Webb. “Land constraints have supported innovative construction such as multi-story development and technology solutions in supply and distribution logistics.”
Webb said growing e-commerce and consumer demand for ever-shorter delivery windows as well as growing data center requirements have “strained” industrial markets in the country’s population centers.
Eric Foster, Avison Young Principal and Practice Leader of the firm’s industrial capital markets group, called the sector a “darling asset class” of capital markets, meaning industrial real estate has received healthy amounts of construction funds. “Because of the solid leasing fundamentals, low vacancies and a lack of available institutional-quality product in most major markets, capital spending in the development space is one of the primary means for investors to gain equitable returns given the certainty of lease-up,” he said.
Industrial vacancy fell or remained flat between first-quarter 2017 and first-quarter 2018 in 28 of the 43 markets Avison Young tracks. Vacancy levels fell below the national average in 19 of 43 markets studied.
Detroit’s 528 million square feet of industrial space posted the sharpest vacancy decline by falling 320 basis points to 2.9 percent. Coastal markets charted the lowest vacancy rates in general: vacancy in Orange County, Calif. fell to 2.2 percent and San Mateo, Calif. industrial vacancy dropped to 1.5 percent.
Net absorption equaled 232 million square feet, nearly 2 percent of total inventory across all U.S. markets during the 12 months ending March 31.
More than 204 million square feet of space was under construction at the end of the first quarter, the report said. Five markets had more than 10 million square feet under construction: Los Angeles and Dallas with 24 million square feet each, Philadelphia and Atlanta with 17 million square feet each and New Jersey with 12 million square feet under construction.
“The U.S. [industrial] market has experienced a healthy tightening over the last several years, though it must be noted that the rate of improvement has slowed as the overall average reached low single digits,” Webb said. “Supply-chain logistics, technology and the availability of affordable power in the form of electricity or other energy sources will be key contributors to the long-term health of the industrial sector.”
