The growth of e-commerce and a steadily improving economy are driving demand for industrial space and helping push industrial vacancy to record-low levels, particularly near major population centers, according to the 2017 U.S. Industrial Midyear Outlook report from Marcus & Millichap.
“Vacancy rates on a national level have fallen to record lows while rent growth has accelerated to outpace all other commercial real estate property types, lifting performance metrics beyond expectations. While some port and intermodal hub markets will receive significant new supply that could dampen local performance, the e-commerce driven demand for urban last-mile warehouse space has sparked the need for more infill industrial space, particularly in major metropolitan areas,” Senior Vice President Alan Pontius, National Director, Specialty Divisions & John Chang, first vice president|Research Services, wrote in the report.
The 48-page report includes a national index on 35 industrial markets and covers national trends affecting performance, capital markets and transactions. Supply and demand metrics for 28 major industrial markets are included along with vacancy, rent growth and pricing trends for those areas.
The report notes the demand from online retail will remain strong this year with businesses continuing to expand warehouse and distribution space, “pushing net absorption past construction to compress vacancy 30 basis points.” Net absorption is expected to be 253 million square feet this year, setting the stage for a potentially new low national vacancy rate this cycle of 5.3 percent. That tight vacancy should support an average rent increase of 7.3 percent, the report stated. California and Florida markets will see the biggest rent gains, with most metro areas seeing rent increases from 7 to 14 percent, much of that driven by greater activity at the ports and expansion of distribution and logistics operations.
Major seaport markets are topping the firm’s inaugural 2017 National Industrial Index, with Seattle-Tacoma at number one on the list of 35 markets. It has one of the tightest vacancy rates—3 percent—and asking rents up 13.3 percent to $8.94 per square foot, a market high. The region is also expecting 3.5 million square feet of new space, up from 3 million in 2016.
Joining Seattle-Tacoma in the Top 10 of the NII are: Orange County, Calif., (second place), followed by Los Angeles; Northern New Jersey; Oakland, Calif.; Detroit; Riverside-San Bernardino, Calif.; Miami-Dade; Portland and Minneapolis-St. Paul.
Orange County and Los Angeles, which have two of the nation’s busiest seaports, also have very tight vacancy, high demand and limited supply that are pushing asking rents up by 8.6 percent in both markets.
Northern New Jersey has the third busiest port in the United States and is also seeing increased demand by e-commerce tenants for last-mile distribution sites as close to populated areas as possible. Asking rent is expected to rise 8 percent this year to $7.54 per square foot following a 9.1 percent increase in 2016.
“To meet space demand and needs, other property types have been razed or repurposed for industrial use in several instances, emphasizing the need for more modern properties. This is prompting developers to add more than 2 million square feet of industrial space this year, primarily in Union County, where users will have access to one of the nation’s busiest ports,” the report stated.
The Hampshire Cos. sold a six-building Northern New Jersey industrial portfolio totaling 1.2 million square feet in June for $146.9 million, including 200 Middlesex Ave. in Carteret, N.J. Other properties were in Lodi, Saddle Brook, South Hackensack and West Caldwell, N.J.
Another port city—Oakland—comes in at fifth place. The Port of Oakland recently made additions, including a near-dock rail facility and plans to build a temperature-controlled logistics facility. With tight inventory and lower construction volume expected—1.5 million square feet compared to 2.5 million square feet in 2016—asking rents should be up 9.1 percent to 11.95 per square foot.
The report notes that distribution hubs like Dallas/Fort Worth (#17); Chicago (#18) and Atlanta (#19) have lower vacancy than other markets because they have more supply being constructed and rent growth is holding in the mid-single digits. Dallas/Fort Worth will see 25.6 million square feet of additional space; Chicago, 15 million square feet, and Atlanta, 14.8 million square feet. Riverside-San Bernardino in California’s Inland Empire leads all markets with 27.5 million square feet of new space this year.
Investors, attracted by the rising rents and robust fundamentals in the industrial sector, will continue to have an appetite for acquisitions this year but compressed cap rates in some top metro areas may see buyers seek properties in secondary and tertiary markets. The report expects a cap rate spread of 350 basis points between primary and tertiary markets this year. Some investors may also be holding back awaiting more clarity on the Trump administration’s plans for tax reform.
Source: Commercial Property Executive