Industrial real estate market making progress but challenges remain, says Jones Lang LaSalle report

Even though the economy is still far from recovered, the industrial real estate market appears to be taking some positive steps, according to a report issued by global real estate firm Jones Lang LaSalle (JLL).

By ·

Even though the economy is still far from recovered, the industrial real estate market appears to be taking some positive steps, according to a report issued by global real estate firm Jones Lang LaSalle (JLL).

According to JLL, the national average vacancy rate for the North American Industrial real estate sector fell from 10.6 percent in the first quarter to 10.4 percent in the second quarter. Despite the slight decline in vacancy, the fragile economy still looms large due to declining consumer confidence, the drying up of economic stimulus funding, and the potential threat of a double-dip recession, the report noted.

“We have seen a positive absorption in the vacancy rate in the second quarter, but we are very concerned going forward,” said Craig Meyer, SIOR, Managing Director and leader of JLL’s Logistics and Industrial Services Group, in an interview. “Any kind of sustained, demand-driven component in the industrial real estate market is going to be driven by jobs. We are just not seeing any of that. It is going to be a long, slow recovery.”

Looking at base indicators like the Institute of Supply Management’s Manufacturing index, Consumer Confidence data, and industrial real estate vacancy and absorption rates, there does not appear to be what Meyer labeled as a strong indication of a positive upswing on the horizon.

The report points out that a need to restock inventories that were running at 50-year lows this year resulted in large occupiers—or companies—strategically capturing high quality logistics space at cyclically low rates. And with slow levels of leasing activity and sparse speculative construction, industrial real estate options—especially in the Class A large block sector—are limited in some markets.

And the swift correction in inventories during the second half of 2009 and first quarter of 2010 has left inventory levels lean and ready for expansion, provided sales rebound in the coming months, said JLL. Should this occur, it could lead to increased industrial and logistics real estate leasing activity.

The report also pointed out that the initial recovery in the economy was largely driven by improvements in the manufacturing sector and cyclical adjustment in inventories. But with the recovery now becoming more broad-based, the recent slowdown of inventory building—or cooling—could have more of an impact on the industrial property sector than the office sector, said JLL. 

“We are also concerned about seasonality with the holiday season coming up,” said Meyer. “The indications we are getting are that we may not see as much preparation for that as we hoped. A lot of retailers are saying they are restocked and if consumer confidence is going down, they are not going to build up inventories. They are going to be more cautious. And for larger, big box companies, they will see declining values in rents, but the availability of product for them to lease is diminishing.”

As a result of this, Class A, big box distribution space is becoming more difficult to find in this economy, said Meyer. But the build-to-suit market could come back eventually for major retailers, as evidenced by a new 1 million square foot distribution center space deal by Amazon.com in Harrisburg, Pennsylvania and a 1.4 million foot location in Phoenix.

But for a mid-sized industrial building in the 100,000-to-150,000 square-foot range Class B-sized building, Meyer said there are an infinite number of these on the market at the moment. The JLL report said that while opportunities exist in every market for deals to be closed at aggressive terms, there is little or no speculative construction occurring at the moment, which is leading to a separation between large-block and medium or smaller warehouse, distribution, and manufacturing requirements.

According to JLL, demand for high-end, prime logistics space is “topping the general market and has given a boost to Midwest markets” like Memphis, Columbus, Dallas/Fort Worth, the Inland Empire in Southern California and key distribution markets in Central New Jersey and Philadelphia and Harrisburg, Pa. They added that the lowest industrial rents are in Columbus and Memphis, and the highest are in San Diego, San Francisco (Bay Area), and south Florida.

Looking ahead, Meyer said there will still be downward pressure on pricing, a double-digit vacancy rate, and no increases in lease rates, which, he noted, are actually weakening a little bit and tend to lag a recovery.


About the Author

Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

Subscribe to Logistics Management Magazine!

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your entire logistics operation.
Start your FREE subscription today!

Latest Whitepaper
Reduce Order Processing Costs by 80%
Sales order automation software will seamlessly transform inbound emailed and printed purchase orders into electronic sales orders that can be automatically processed into your ERP system with 100% accuracy.
Download Today!
From the June 2016 Issue
In the wildly unstable ocean cargo carrier arena, three major consortia are fighting for market share, with some players simply hanging on for survival. Meanwhile, shippers may expect deployment shifts as a consequence of the Panama Canal expansion.
WMS Update: What do we need to run a WMS?
Supply Chain Software Convergence: Synchronization Realized
View More From this Issue
Subscribe to Our Email Newsletter
Sign up today to receive our FREE, weekly email newsletter!
Latest Webcast
Optimizing Global Transportation: How NVOCCs Can Use Technology to Operate More Profitably
Global transportation isn't getting any easier to manage, especially for non-vessel operating common carriers (NVOCCs). Faced with uncertainties like surcharges—but needing to remain competitive when bidding against other providers—NVOCCs need the right mix of historical data, data intelligence, and technology support to make quick and effective decisions. During this webcast you'll learn how Bolloré Transport & Logistics was able to streamline its global logistics and automate contract management.
Register Today!
EDITORS' PICKS
Details Key to Cross-border Ease
Ever-changing regulations are making it risky for U.S. companies engaged in cross-border trade...
Digital Reality Check
Just how close are we to the ideal digital supply network? Not as close as we might like to think....

Top 25 ports: West Coast continues to dominate
The Panama Canal expansion is set for late June and may soon be attracting more inbound vessel calls...
Port of Oakland launches smart phone apps for harbor truckers
Innovation uses Bluetooth, GPS to measure how long drivers wait for cargo