Cautious optimism is turning into genuine belief as the industrial real estate sector finds itself in a long-awaited recovery mode.
“The recovery is fully entrenched, with the manufacturing sector leading the way,” said Edward J. Schreyer, senior executive managing director of industrial services in the Americas for global real estate services company CB Richard Ellis.
Economic indicators, especially manufacturing and port activity, point to a good year for an U.S. industrial real estate market that sank badly during the 2008-09 downturn. Manufacturing grew at an annualized rate of 9.1 percent, while manufacturers’ new orders increased by an “astounding” 23.3 percent from a year earlier, according to a second quarter 2011 CB Richard Ellis report.
“This is a healthy increase and implies that growth in the sector should continue,” the report said.
Helping the market is a wave of inventory restocking, as shippers moved more freight than normal in the first quarter. Almost 45 percent of logistics managers surveyed by Wall Street equity research firm Wolfe Trahan said they saw more inventory activity than usual in the first quarter, and a similar number said that activity is continuing in the current quarter.
The pickup in freight volume and manufacturing is translating into increasing sales and leasing activity at the country’s warehouses and distribution centers, with a tightening of premium Class A facilities. The nationwide availability rate for that space fell for the third consecutive quarter in the January-March period, with most markets recording flat or declining rates. Vacancy rates for all industrial space declined for the fourth consecutive quarter to its lowest level since the second quarter of 2009, at the depths of the recession, according to real estate developer and analyst Grubb & Ellis.
But at 14.1 percent, Class A space availability is still running at record-high levels that aren’t expected to drop to its historical average of 10 to 11 percent for at least a few years.
Speculative construction, which screeched to a halt when the recession hit in late 2008, is starting up again in key markets, such as Southern California’s Inland Empire and Central Pennsylvania, as developers explore strategic land acquisitions and seek permits.
Consolidation activity also is contributing to increased demand for Class A space.
“The actual spec building will start by the fourth quarter,” Schreyer said. “Developers need a little more rental increase to cover the cost of new construction versus where rents are today.”
The New Jersey industrial real estate market, one of the nation’s biggest with more than 800 million square feet of space, reported a decline in availability of Class A space to 11.6 percent, the biggest quarterly improvement since 2007. Absorption levels are at five-year highs.
New Jersey fared better than most U.S. markets during the recession because of its proximity to and activity at the Port of New York and New Jersey, the nation’s third-largest port after Los Angeles and Long Beach, Schreyer said.
The availability rate in the Chicago industrial market, with 1.2 billion square feet of total inventory, is at 10.7 percent, a slight improvement over the fourth quarter of 2010. Leasing and sales activity are consistent with 2009-10 levels. Several large built-to-suit projects broke ground in the quarter, including Home Depot’s 657,000-square-foot facility in Joliet, but there is no speculative building.
“Speculative construction will continue to hibernate until the Chicago industrial market returns to pre-recession availability and absorption levels,” the CBRE report said.
The Dallas-Fort Worth industrial market improved markedly in absorption, vacancy rates and other measures in 2010 and in the first quarter of 2011. Increasing tenant demand, combined with low levels of new supply, is creating favorable conditions for the market.
Despite limited new construction, “the number of projects reaching completion and in the pipeline still pales in comparison to historical norms in Dallas/Fort Worth,” the CBRE report said.
Driven by port activity, Southern California’s Inland Empire industrial market improved steadily throughout 2010 and in the first quarter of 2011. The market had 8.1 million square feet of gross activity for the quarter, an increase of 1.3 million square feet over the same period last year. Net absorption totaled 3.2 million square feet, up 37 percent, led by Hewlett-Packard signing a seven-year lease for 1.4 million square feet.
“The recovery at the twin ports has had positive results for the Inland Empire’s transportation and wholesale trade sectors throughout 2010, and the area should continue to see more positive results in the coming months,” the Los Angeles County Economic Development Corp. said.
The availability level for 500,000-square-foot buildings and up is down to 5.6 percent from 7.8 percent in the prior quarter. Many of the more than 80 lease and sale transactions in the quarter — up from 64 deals in the fourth quarter of 2010 — were for space greater than 100,000 square feet.
In north Los Angeles, limited supply is allowing landlords to get a 25 percent rent premium on Class A buildings, and developers are starting to underwrite and purchase land for speculative development. The Inland Empire also is attracting significant amounts of investment capital for leased and vacant buildings.
Miami’s industrial sector is strengthening in all market fundamentals, with four consecutive quarters of positive absorption and lower vacancy rates. Demand for Class A space has skyrocketed, resulting in shortages and increased rent.
Rental rates also are stabilizing in Atlanta after nine consecutive quarters of decline because of excess capacity. Active “mega tenants,” those with space requirements exceeding 500,000 square feet, in the first quarter included Clorox (1.15 million square feet), Phillips-Van Heusen (851,349) and Electrolux (600,000). These deals contributed to a modest dwindling of inventory in overbuilt Atlanta.
Contact David Biederman at email@example.com.