Demand for warehouse, distribution, and e-commerce fulfillment space exceeded supply in 2015 across the U.S., and Jones Lang LaSalle projects these conditions will persist next year, according to the JLL 2016 Industrial Outlook.
“Market conditions will remain strong and we see no sign of a change in the coming months,” said Craig Meyer, president, industrial brokerage, JLL Americas. “Instead, all indicators point to demand again outpacing supply in 2016 with a continuing drop in vacancy rates,” Meyer said.
Although e-commerce fulfillment is driving some of the growth in the industrial real estate market, all segments are performing well, especially port-related developments that will benefit from completion of the Panama Canal expansion project in the spring of 2016.
The national vacancy rate for warehouse, distribution, manufacturing and special-purpose industrial real estate in the third quarter of 2015 was 6.7 percent, which is a 14-year low, the JLL report stated. These conditions have resulted in an increase in speculative groundbreakings, consistent absorption gains, a healthy pool of active tenant requirements and continuing growth in rents.
Stringent underwriting standards and discipline among market participants limited new developments since the economic recession of 2008-09. “As a result, net absorption has outpaced construction completions since 2010, and 2015 will mark a continuation of this trend,” the report stated.
Net absorption nationwide has been positive for 22 consecutive quarters, and 46 of the 50 markets surveyed posted gains during the third quarter. Average asking rental rates had year-over-year increases in those markets. Net absorption in the third quarter totaled 164.8 million square feet, up 12.6 percent from the same period last year.
Under-construction activity totaled 170.7 million square feet, an increase of 19.8 percent from the first nine months of 2014. About 35.5 percent of the space was pre-leased. JLL anticipates annual growth in rental rates in 2016 will be in the mid-4 percent range.
Since current and projected future demand from active tenant requirements in the market are approximately two times that of speculative construction underway, “there is still plenty of room for further development,” the report stated.
Big-box distribution facilities of 500,000 to more than 1 million square feet are leading construction activity. These large-scale, modern warehouses give top retailers and distributors the economies of scale of operating under one roof, whether serving as national distribution centers or regional distribution facilities. These buildings feature wider column spacing, higher clearances and higher dock-high door counts.
The U.S. is on track to add 179.3 million square feet in new completions in 2015 and 228.7 million square feet of of net absorption. “This means satisfied demand will continue to outstrip supply for the sixth consecutive year, and additional rent growth is likely,” JLL stated. While this trend should continue into 2016, the gap between absorption and new completions will narrow as speculative groundbreakings increase, and nationwide a measure of equilibrium should be reached in 2017, JLL stated.
The Los Angeles industrial real estate market continues to lead the U.S. with the lowest vacancy rate of 2.5 percent, followed by Long Island at 2.7 percent, Denver, 2.8 percent, Orange County, California, 3.1 percent, Seattle, 3.7 percent and Portland, 4.2 percent.
The highest quarterly net absorption rate in the third quarter was recorded by the Inland Empire east of Los Angeles, with 6.69 million square feet. Atlanta was second at 5.21 million, followed by Chicago at 4.5 million, Los Angeles, 3.72 million, Philadelphia/Harrisburg, 3.13 million and Seattle, 3.11 million square feet.
California’s Inland Empire also led the U.S. with the highest under-construction space of 21.04 million square feet, followed by Philadelphia/Harrisburg, 18.61 million, Atlanta 17.03 million, Dallas/Fort Worth, 14.70 million, Chicago, 14.30 million and Houston, 9.71 million square feet.
JLL included commentaries on conditions in each of the 50 markets surveyed. Some highlights for inland distribution hubs include: Atlanta, with brick and mortar retailers and e-tailers leading current demand; Chicago, with leasing activity for 10,000 to 80,000-square foot industrial properties at the highest level since 2008; Dallas/Fort Worth, with market dynamics shifting from landlord-favorable to an equilibrium point between new supply and demand and Memphis, where net absorption this year is expected to reach a 10-year high.
For port-related markets, JLL stated that in Oakland and the East Bay, vacancy is below the 2008 mark and is approaching a rate last seen in 1999-2000. Houston’s market is reporting increased available space due to bankruptcies in the oil and gas industry. In the Inland Empire, properties of 600,000-800,000 square feet are a soft area of the market, but properties below 200,000 square feet are in high demand and short supply. A lull in construction starts in New Jersey in the first half of the year gave way to a notable increase in the third quarter. In Seattle, “Projected new supply is not even close to meeting tenant demand,” the JLL report stated.
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