The U.S. economy may have hit a soft patch, but the industrial real estate sector has rebounded strongly from the recession of 2008-09, especially those warehouses and distribution centers tied to imports.
“Industrial real estate is leading the general economy because of trade growth at the ports,” Steve Batcheller, partner in the Panattoni Development Co., told the Industrial Conference for Commercial Real Estate Thursday in Long Beach.
Bart Pucci, senior vice president, industrial, at Grubb & Ellis, said the recovery in industrial real estate has progressed much faster than the industry anticipated, especially in Southern California, where developers are once again building large distribution warehouses on speculation. “I didn’t think we’d be talking about spec for another four years,” he said.
Southern California, with about 1.5 billion square feet of industrial properties, is not only the largest, but also the fastest growing region in the country. Vacancy rates in the South Bay, close to the ports of Los Angeles and Long Beach, are down to about 3 percent. Even in the Inland Empire 50 miles east of the ports, which was especially hard hit by the recession, vacancy rates are back in single digits.
Batcheller said he knows of a half-dozen buildings of 500,000 square feet or larger scheduled to be built on speculation in the Inland Empire.
In addition to its access to the ports of Los Angeles and Long Beach, the Southern California market benefits from its finite amount of land available for development as it is hemmed in by an ocean to the west and mountains to the east, said Gene Reilly, president of the Americas at AMB Property.
Other port-related regions showing strong growth in the industrial real estate sector include northern New Jersey and eastern Pennsylvania and South Florida. Atlanta is also coming back, but the vacancy rates are still high, Reilly said. Chicago is likewise coming back strongly.
A flood of capital is feeding the industrial estate boom as investors seek higher yields. “Treasury yields are low so there is a lot of interest in buildings,” Reilly said.
Rents are not a good barometer of the strength of the industrial sector as they vary greatly, even within the same region. For example, leases signed during the depth of the recession are quite low. Batcheller said rents are beginning to go up, but they are still “skinny” by historic standards.
Large Class “A” buildings of 500,000 to more than 1 million square feet with plenty of truck bays located on large tracts of land in market served by busy seaports are the most desirable properties. Generally, smaller properties in less desirable locations are sitting vacant, Batcheller said.