In the past year some observers of the US industrial market have raised concerns about the quickening pace of new development and wondered if a glut was forming.
But in Chicago, at the recent BMO Capital Markets’ 10th Annual North American Real Estate Conference, it was apparent that industry leaders remain fairly bullish about the sector’s prospects.
“The US market has had ten straight quarters when demand outstripped supply,” said James Connor, senior vice president and chief operating officer of Duke Realty, one of the nation’s most active builders, at an afternoon session on e-commerce and the future of warehousing.
There are a few markets, such as Dallas and Phoenix, that he would put on a “watch list” because its at least possible that developers in these metro areas have launched too many projects. However, he also pointed out that Dallas is on a record pace when it comes to absorption, so the warning was a mild one.
The decline in oil prices has worried some, especially those with real estate interests in cities dependent on the energy sector. But Marshall Loeb, president and chief operating officer of EastGroup Properties and another panelist, said that although company officials are closely watching the market in Houston, so far the oil price collapse has not made a serious dent in demand. In fact, its properties in Texas are about 97% occupied.
“We’re more worried about recession than oversupply,” said Marshall Loeb, EastGroup Properties.
There is even the possibility that demand will grow stronger in the near future. Johannson Yap, the chief investment officer of First Industrial Realty Trust, pointed out that in the aftermath of the recession heavily-capitalized firms began expanding again, but many small- to mid-sized users remained cautious. And we may have reached the point in the cycle when the smaller users will begin clamoring for new facilities.
“There has been less supply in the small-to-mid size range,” said Johannson Yap, First Industrial Realty Trust.
When asked by Paul Adornato, a managing director of US REIT Research, BMO Capital Markets and the panel’s moderator, whether their companies were willing to engage in speculative development, all three corporate leaders answered in the affirmative. They also reported that their new projects were not having trouble bringing in tenants.
“Our development pipeline has been more than 50% pre-leased,” said Connor, although much of Duke’s work is made up of build-to-suits. That high level of demand means he “sleeps better at night.”