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Warehouse Market Takes Off Like a Skyrocket

Volume 2, Issue 6
March 31st, 2014
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Warehouse space demand exceeded expectations in the last quarter of 2013 and absorption reached the highest levels on record, CoStar Group reported.

The commercial real estate research firm said net absorption totaling 58 million square feet of warehouse/distribution space was recorded within the 210 largest U.S. markets.

Meanwhile, CoStar said the 45 million square feet absorbed in the top 54 markets ranks as the sixth-highest quarterly reading on record – and the strongest since the recovery began.

WarehouseFor the full year of 2013, total warehouse absorption reached 162.6 million square feet in the top 210 markets, surpassing 2012’s totals.

Almost every major market has seen year-over-year occupancy gains, led by a pair of Keystone State markets: Harrisburg and Lehigh Valley, PA.

“Right now, we’re seeing vacancies on a national level lower than the entire period of the last cycle,” said Rene Circ, director of industrial research. “You have to go back to before the bursting of the Internet bubble in the early 2000s to see vacancies for U.S. industrial space below that 7.6% number.”

A total of 162 out of 210 markets showed positive net absorption for a total of 162.6 million square feet, 39% increase over the 117 million square feet in 2012. Dallas, the Inland Empire, Chicago, Atlanta, Columbus, Cincinnati and Memphis led the gainers, while Northern New Jersey lagged with 150,000 square feet of negative absorption.

In the last year, most markets started moving into a late expansionary phase, where most major warehouse markets began to see new construction exert pressure on occupancies, CoStar said.

Developers delivered 80.6 million square feet in 2013. However, the 82 million under construction at end of December has jumped to 98 million in the first few weeks of 2014. Four of the 18 big boxes larger than 900,000 square feet currently under construction, and 36 of the 50 buildings larger than 500,000 square feet, are being built on speculation.

CoStar added that California’s Inland Empire and Dallas/Fort Worth markets are the strongest in terms of both demand and new supply.

About 9.4 million square feet was completed in the Inland Empire last year, and the 11.6 million square feet under construction at the end of 2013 has jumped to nearly 14 million since then. Houston, Chicago and Phoenix also show strong levels of new supply.

Asking rent growth was also very strong across most markets, with the national average of $4.81 per square foot up 2.5% over 2012.Growth was even stronger in the top 54 markets at 3.8%, the research found.

In certain supply constrained markets, year-over- year rent growth was eye opening, CoStar noted, including Edison, NJ at 9.6%; Los Angeles, 8.9%; Orange County, 7.9% and Miami, 7.5%. There is room for growth, the researchers said, because rents are still well below their peaks in most markets.

Retailers and logistics companies remain very active and ecommerce continues to drive demand for both pure plays like Amazon and traditional retailers like Walmart, which took 1.2 million square feet in the Lehigh Valley, and another 788,000 in the Dallas market.

“Modern space with proximity to population centers and a robust logistics infrastructure will dominate the industrial real estate sector in 2014,” said Meyer, who attributed 40% of current big-box requirements to ecommerce – a sector growing globally by 20% annually as retailers develop real estate models to support omnichannel logistics.

Notable deals included Restoration Hardware’s lease for 850,000 square feet in Dallas’s Great SW/Arlington submarket. Companies recently leasing spaces that exceed 500,000 square feet include Excel Logistics and Deckers Outdoor Corp. in the Inland Empire, Sephora Americas in Baltimore, Ceva Logistics in Nashville, Trader Joe’s in Chicago GENCO in Memphis and Owens
& Minor in Chicago.

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