The industrial real estate market in the U.S. is bouncing back from the 2008-09 recession, but like the overall economy, the recovery is cautious and methodical.
Developers of warehouses and distribution centers agree the absorption of existing space and construction of new facilities will continue to improve moderately into 2013 as U.S. trade volumes likewise increase slowly but steadily.
For many builders, near-historical-low interest rates are almost too attractive to pass up. And for retailers and other shippers looking to expand their distribution activities, lease rates for quality properties, while increasing, are still reasonable.
That adds up to a balance that keeps everyone involved in real estate happy. Richard Thompson, executive vice president and leader of the global supply chain solutions team at commercial real estate company Jones Lang LaSalle, said industrial real estate is attractive again for all segments of the industry — investors, developers, operators and users of warehouses and distribution centers.
Still, the recovery in industrial real estate is uneven, fastest in core markets near seaports such as Los Angeles-Long Beach and New York-New Jersey and inland hubs such as Chicago, Dallas and Atlanta.
Larger facilities of from 400,000 square feet to more than 1 million square feet are in vogue. Demand is also strong, and availability is scarce for premium Class A properties, while smaller, less desirable Class B properties are languishing in many markets.
Blaine Kelley, senior vice president of the global supply chain practice at commercial real estate firm CBRE, said net absorption numbers are skewed by the demand for the handful of large properties available in core markets, with a number of smaller properties in secondary markets still vacant. “The core market nationwide has fared well,” he said.
The national vacancy rate is down to 9.1 percent from the double-digit rates during the recession, but that’s still higher than the 7.5 percent pre-recession rate. Jones Lang LaSalle’s research on second quarter 2012 vacancy rates in selected markets tells the story, with West Coast port-dependent markets generally doing the best.
Los Angeles County’s 5.1 percent vacancy rate is among the lowest in the country. The Inland Empire distribution hub 50 miles east of Los Angeles has a vacancy rate of 6.4 percent. Southern California has the nation’s largest concentration of industrial real estate, with about 1.5 billion square feet of space.
Economist John Husing, who specializes in the Inland Empire, said activity in the warehouse, distribution and transportation sectors was especially brisk in late 2011 and the first quarter of 2012 as existing properties were snapped up and little new space came on line. “It was making up for a lot not happening the year before,” he said.
Absorption in the Inland Empire, however, slowed in the second quarter in line with the slowing U.S. economy and modest growth in imports at the ports of Los Angeles and Long Beach, Husing said.
Seattle’s second quarter vacancy rate stood at 5.7 percent and Portland’s was 7.6 percent, according to Jones Lang LaSalle. The San Francisco peninsula’s vacancy rate was only 5.7 percent, but Oakland/East Bay’s was 10.4 percent.
Central New Jersey in the second quarter had a vacancy rate of 9.5 percent, and in northern New Jersey it was 7.9 percent. Houston’s vacancy rate was only 3.9 percent; with Jacksonville at 12.7 percent; Hampton Roads, 8 percent; and Miami-Dade County, 8.3 percent.
At inland locations, Chicago’s vacancy rate was 10.6 percent; Dallas, 8.5 percent; Atlanta, 12.5 percent; and Columbus, Ohio, 9.2 percent.
Markets capable of supplying big-box properties are doing well. The Tejon Ranch hub north of Los Angeles in Kern County closed on some big deals during the past year, said Barry Zoeller, vice president of corporate communications at Tejon Ranch Co.
Caterpillar in the fourth quarter should complete construction of a 400,000-square-foot parts distribution center. Dollar General, which is making a big push into the West, opened a 606,000-square-foot distribution center in April. Tejon Ranch continues to field inquiries from companies looking to develop big-box facilities of more than 1 million square feet, Zoeller said.
Although much of the industrial real estate activity across the nation involves big-name U.S. developers and retailers, foreign investors also are rushing in. Australia’s Goodman Group, a global investor with a strong presence in Australia, Asia and Europe, made headlines recently by announcing it intends to invest $1.5 billion in Class A properties in major U.S. coastal and inland hubs. “Its only gap is in the U.S.,” Thompson said.
Global companies today want real estate partners with a presence in major consuming markets around the world, especially the U.S., he added.
Global companies also are looking for safe investment opportunities in growing economies. Although economic growth has slowed in the U.S., the market is still doing better than Europe’s. Industrial real estate values in the U.S. are up 35 percent compared to 2009. And although values are still 15 percent lower than they were pre-recession, conditions in core markets are considered favorable, Thompson added.
Traditional retailers and third-party logistics companies that serve retailers and importers are still major drivers of the industrial real estate market and are expected to remain so. The growth of e-commerce fulfillment, important to traditional retailers and pure online sellers such as Amazon, is coming on strong, however.
E-commerce fulfillment is changing the landscape by creating a need for more facilities located close to various population centers, as opposed to the traditional model of a few large facilities located at seaports and in the biggest inland hubs. Driving the shift is e-commerce customers who expect their orders to ship the day they’re placed, with delivery by the next business day. “The players are the same (retailers), but there’s a new set of demands,” Kelley said.
He expects e-commerce growth to accelerate as the phenomenon expands beyond the large national retailers, many of which have e-commerce fulfillment centers, to the mid-range retailers just now getting into e-commerce fulfillment.
The return of manufacturing activities to the U.S. also is driving demand for more industrial real estate space. Wages in coastal China, sometimes described as the world’s factory floor, are increasing at a rate of about 15 percent a year, while manufacturing wages in the U.S. have stagnated.
Add the risks associated with political unrest and major weather events that have interrupted overseas manufacturing in recent years, plus the desire of retailers to achieve better control over their transportation supply chains, and there is a noticeable trend toward manufacturing some products in the U.S., Thompson said.
Inventory carrying costs may not have been as great a concern for retailers recently because of the low interest rates, but rates are probably near the bottom and will increase eventually. The result will be a desire to locate the source of production closer to the consuming market in the U.S., he said.
Although conditions are still noticeably below the peak years prior to the recession, the industrial real estate sector has experienced eight consecutive quarters of positive net absorption, the Jones Lang LaSalle’s second quarter report noted.
The very early stages of a bull market are surfacing, such as in Southern California’s Inland Empire, where speculative development has resumed and “demand seriously outstrips supply,” the report stated. Ten facilities totaling 4.6 million square feet are under construction there.
There are signs of speculative building of industrial real estate properties in 17 markets nationwide, Thompson said. “That’s a huge sign of good things to come.”