Logistics real estate market poised for growth in 2012, says Grubb Ellis report

While 2012 is expected to be a slow growth year overall for commercial real estate sector, a report from global commercial real estate company Grubb & Ellis Company cited how the logistics real estate market “has become the most resilient and dynamic segment of the overall U.S. industrial real estate market.

According to the report, entitled “2012 National Real Estate Forecast,” even though logistics accounts for a quarter of total industrial space, it has captured 70 percent of total demand since the second quarter of 2010. And while cumulative demand for overall industrial real estate did not turn positive until the end of 2011, cumulative demand on the logistics side was in positive territory by mid-2010 in growing to 75 million square feet by the end of 2011. Grubb and Ellis also pointed out that since 2001 roughly 70 percent of all new construction was for logistics-related buildings, with the level of supply generally exceeding demand.

In an interview with LM, Tim Feemster, Grubb & Ellis senior vice president and national director, logistics, said that a main boon to the positive logistics real estate activity stems from companies trading up into Class A space. As defined by Grubb & Ellis, Class A buildings are comprised of: state-of-the-art functionality, systems, and finishes; have a minimum of 28-foot clear height for buildings over 100,000 square feet; have an excellent truck-door/building ratio (minimum of 1/7,500 square feet; and excellent truck yards with a minimum of 135-foot truck turning radius.

“What companies basically did was trade up,” Feemster said. “If they were in a Class B building in a renter’s market which it was in for the past year and a half, they could go from 200,000 to 300,000 square feet in a Class A building at the same rent level or close to it. When we talk about logistics buildings, they are buildings that are at least 100,000 square feet.

Looking at the U.S. logistics vacancy rate, Grubb & Ellis noted that the rate peaked at 13.8 percent at the end of 2009, dropped more than 300 basis points by the end of 2011, and is expected to fall into single digits by the end of this year. But it cautioned that the 2012 rate of improvement will slow down as new deliveries accelerate at a faster rate than demand that is hindered by sluggish domestic and global economies.

The reason for this, explained Feemster, is that companies are starting to build speculative or “spec” buildings, as the vacancy rate at certain sizes of buildings in certain markets does not translate into a general event across the country. Grubb & Ellis expects speculative construction to spread to 16 major U.S. markets in 2012.

He cited the Inland Empire in southern California as an area which had experienced a shortage of big box buildings and is now seeing increased development for logistics properties in the 500,000 to 600,000 square-foot range and up, because there were two or three in the 1 million square foot range being built in 2011, whereas 18 months ago there were ten buildings that size which were quickly rented.

“It is the same ‘trading up’ thought process, and in some specific markets they are actually starting to build specifically around a targeted vacancy area, rather than a mass event,” said Feemster. “Nobody is going to build a 200,000 square foot building in the Inland Empire, because there are already so many available. Even though the vacancy rate is small, the market is so huge that even a low vacancy rate translates into a lot of square footage.”

Industrial Outlook: The report indicated that demand for industrial real estate in 2011 saw a net absorption of 110 million square feet compared to 2010’s 34 million square feet.

Of particular interest was how warehouse/distribution space captured three quarters of total demand while accounting for half of the total inventory. And Class A logistics space, which Grubb & Ellis said is a subset of warehouse and distribution, represented 20 percent of total industrial inventory and 50 percent of demand in 2011.

In 2012, the report said that demand will increase but only by about 15 percent to 130 million square feet due to the economy. And it said that 3PLs will play a large role in driving Class A distribution sector growth.

“3PLs are continuing to play a major role on this side as companies are continually looking to outsource non-core competencies,” said Feemster.