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Industrial Real Estate Market Reflects a Better Economy for Logistics

Net demand for industrial space could reach 242 million square feet in 2015, thanks to the U.S. economy’s accelerated growth through the end of 2014 and robust indications of it gaining more strength this year, according to the NAIOP Research Foundation.

Other research organizations have been similarly bullish about the commercial and industrial real estate markets based on a healthy economy and continuing job growth.

However, some economists and the Federal Reserve expressed concerns about the eocnomy’s fragility and the strengthening of the U.S. dollar, which discourages exports.

The NAIOP researchers estimate that 2015 quarterly net absorption will average 60.5 million square feet. They pointed out that in 2014 industrial net absorption reached a near-record 224 million square feet – an 8% increase over 2013. In addition, asking rental rates steadily elevated in each quarter of 2014. (NAIOP was earlier called the National Association for Industrial and Office Parks).

“We expect the first half of 2015 to be slightly more robust than the second half, as pent up demand is satisfied and the economy starts to temper,” said Dr. Joshua Harris of the University of Central Florida and study co-author of the study along with Dr. Hany Guirguis of Manhattan College.

“This trend should likely persist throughout 2016, when our absorption forecast moderates to a net gain of 206 million square feet,” he added.

NAIOP president Thomas Bisacquino observed, “A great deal of the demand for industrial space to come from firms that produce and distribute consumer goods, and that’s why commercial real estate is seeing such a boom in e-commerce fulfillment and distribution facilities.”

Real Estate Prospecting for Logistics is in Full Force, Still can’t support Demand

Cushman & Wakefield’s 2015-17 industrial real estate forecast said ecommerce is fueling new warehouse and distribution projects in major logistics hubs like Dallas/Fort Worth, California’s Inland Empire, Chicago and Atlanta.

Overall, the warehouse sector has posted 19 consecutive quarters of declining vacancies, now standing at 6.7% nationally, Cushman & Wakefield said. Even with considerable new construction, they believe the vacancy rate will drop to 6.3% in 2015.

In Canada, Greater Toronto continues to see significant speculative development, notably big-box industrial projects, with 7.3 million square feet under construction at the end of the third quarter, with nearly five million of that on spec.

The National Association of Realtors, working with Deloitte and RERC Situs, issued a study in late February predicting a decline in the vacancy rate for industrial space of 0.4% and 0.3% for retail space as manufacturers boost production, and consumers slightly accelerate their spending.

Slow Economies Overseas Coupled with a Strong Dollar could effect Long Term Logistics Business

“Sluggishness overseas alongside a strengthening U.S. dollar will widen the trade deficit and slow economic growth potential,” said NAR chief economist Lawrence Yun.

“However, GDP is forecasted to come in around 3% in 2015 – the highest since the recession,” he added. “Improvements in housing and commercial real estate market activity will measurably help economic growth.”

NAR projects that industrial vacancy rates will fall from 8.7% in the first quarter to 8.3% in the first quarter of 2016. Currently the areas with the lowest industrial vacancy rates are Orange County, CA, with a vacancy rate of 3.4%; Los Angeles, 3.7%; Miami and Palm Beach, FL, both at 5.4%; and Seattle, at 5.6%.

Annual industrial rents should rise 3% this year and 3.1% in 2016. NAR expects national net absorption of industrial space to total 102.2 million square feet in 2015 and 104.8 million square feet next year.

NAR expects retail market vacancy rates to decline from 9.7% currently to 9.5% in the first quarter of 2016. Currently, markets with the lowest retail vacancy rates include San Francisco, 3%; Fairfield County, CT, and San Jose, CA, 4.5%; Long Island, NY, 4.9%; and Orange County, CA, 5%.

Average retail rents are forecast to rise 2.5% in 2015 and 3.1% next year. Net absorption of retail space is likely to total 15.7 million square feet this year and jump to 20.6 million in 2016.

Stability is a Primary Concern for Warehousing Companies

Late last fall PwC US and the Urban Land Institute predicted continued sustained growth in 2015 for the U.S. commercial real estate industry. They added that the industry is concerned about mega trends like accelerating urbanization, demographic shifts and the impact of disruptive technology.

Although construction in the industrial sector will slow this year, the PwC and ULI researchers said it stands atop the sector rankings for investment.

“Just as the slow recovery in jobs has hindered many other economic growth indicators, so too has the jobs recovery made real estate professionals wary of calling a bounce back in retail,” they said. “Optimism has seemed premature – or even unrealistic. It’s time to question that as the story for retail for the second half of this decade should be of expectations exceeded.”

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