Industrial Real Estate Demand to Grow in 2012, Report Says

Modest growth in demand will outpace expansion of warehouse and distribution center space to lower vacancy rates and raise rents this year, Grubb & Ellis said a recent report.

“The greatest milestone of 2011 was the lease-up of all the space vacated during the recession,” said Robert Bach, senior vice president and chief economist at the real estate services and investment firm. “The lack of new deliveries funneled demand to existing properties, giving the market time to heal.”

Demand for industrial real estate accelerated significantly in 2011, with total net absorption of 110 million square feet, up from only 34 million square feet absorbed in 2010, according to the firm’s National Real Estate Report.

Net absorption is expected to rise only 15 percent to 130 million square feet in 2012, “due to the uncertainty overseas and the sluggish domestic economy,” Grubb & Ellis said.

Industrial vacancy, which fell 0.9 percent to 9.5 percent in 2011, is projected to fall to 8.7 percent by the end of this year. New supply is expected to double to 40 million square feet in 2012 after remaining constrained throughout 2011.

Average rents for warehouse/distribution space are expected to increase to $4.44 per square foot in 2012 from $4.23 in 2011, while asking rental rates for R&D/flex space are predicted to increase to $9.25 per square foot from $9.23 in 2011.

Rates for general industrial space are expected to remain flat at $4.94 per square foot. Smaller, second-generation warehouse spaces likely will continue to struggle despite aggressive concession packages and depressed rent levels, Grubb & Ellis said.

The report said prospects for investment in industrial real estate during the next five years are brightest in markets serving seaports or inland ports that benefit from growing international trade. Los Angeles ranked tops in the report’s investment opportunity monitor, followed by Houston, California’s Inland Empire, Dallas-Fort Worth, Chicago, Miami, Oakland-East Bay, Calif., Atlanta and Philadelphia-Central Pennsylvania.

Phoenix made the list at No. 10 due to its success in attracting large tenants that historically would have ended up in California, Grubb & Ellis said.