Builders are breaking ground in gateway markets, most notably in Chicago, according to data and analysis provided by commercial real estate services firm Jones Lang LaSalle. However, overall U.S. growth is not restricted to a particular region. Year-to-date, 42 of 48 JLL-tracked markets are showing positive net absorption gains.
A recent study of U.S. industrial real estate market demand prepared by JLL showed that although demand for industrial space was down from the year before, the number of requirements was up. “This means the average space requirement is smaller: good news as it relates to industrial’s measured recovery,” said Dain Fedora, Research Manager of Americas Industrial at JLL. “In years past, modern big box warehouses, space of at least 500,000 square feet, were the most sought after product for consolidation moves. The available supply has since narrowed, and this is prompting an uptick in speculative groundbreakings. While demand for this size threshold remains, for instance, among e-commerce users and large retailers, demand has become more widespread across size segments.”
The number of buildings under construction soared in the U.S. market in the second quarter. A total of 81.7 million square feet of industrial space was under construction, up from 62.7 million in the first quarter, increasing more than 30 percent. Growth was also apparent year-over-year, as it jumped 81 percent compared with the second quarter of 2012, when 45.2 million square feet of industrial buildings were under construction. Jones Lang LaSalle said that 57.8 percent of the square footage in the second quarter is preleased. “Although speculative construction is back, current groundbreakings will not sufficiently address present demand requirements for modern space. This will lead to tenants competing for quality spaces (which will elevate rents), exploring Class B options, considering smaller spaces or opting for build-to-suits,” JLL noted.
The square footage of new buildings delivered in the second quarter of 2013 saw year-over-year growth for a fifth consecutive quarter. A total of 17.2 million square feet of new buildings were completed and made ready for occupants in the second quarter, 105.3 percent higher than the 8.4 million square feet delivered in the second quarter of 2012. Square footage was also up 20.4 percent from the first quarter of 2013, which saw 14.3 million square feet completed. JLL noted that 61.3 percent of the square footage completed was leased.
Net absorption (buildings actually being occupied and vacated, irrespective of leases) was positive for a 13th straight quarter, although the level fell year-over-year for the first time since the first quarter of 2012. Net absorption reached 37.1 million square feet, down 2.7 percent from the second quarter of 2012. On a quarterly basis, net absorption inched down 0.6 percent from the first quarter of 2013, when it had fallen 35 percent.
“Second quarter’s largest net absorption gains came from Chicago, Dallas and Atlanta,” said Trevor Ragsdale, lead Midwest industrial broker at JLL Industrial, Americas. “Echoing JLL’s demand study, 51 million square feet of tenant requirements are based in the Midwest, and Chicago benefitted from these space needs. Chicago’s increased activity was driven by food packaging and consumer products companies as well as continued strong demand from third party logistics operators. Chicago also experienced increasing demand from small to medium sized manufacturing users indicating a broader market recovery,” said Trevor Ragsdale, lead Midwest industrial broker at JLL Industrial, Americas
The vacancy rate in the U.S. market fell further, down to 8.3 percent in the second quarter of 2013 from 8.4 percent in the first quarter of 2013 and from 9 percent in the same quarter a year ago, “indicating demand for space remains consistent,” according to JLL. The vacancy rate has been steadily falling for more than three years. It has improved by 2.3 percentage points since the first quarter of 2010, when it stood at 10.6 percent. “West Coast markets, such as the Inland Empire, continue to outpace the nation in terms of rental growth and diminishing vacancy rates. The Midwest leads in demand requirements with 50.5 million square feet. These regions house markets with vacancy rates above the national average, so they have space to burn. Tenants in need of modern space will compete for speculative construction or pursue the build-to-suit option in major logistics corridors,” JLL said.