Supply chain managers may see decline in warehouse vacancies

Fourteen consecutive quarters of declining vacancies in the warehouse sector highlight the U.S. industrial real estate market’s momentum through the third quarter of 2013, according to Cushman & Wakefield. The commercial real estate service firm’s latest national market research data released this week shows that this momentum is further punctuated by continued strong leasing velocity and absorption, and construction levels that already have surpassed last year’s total.

“Pent-up consumer demand for housing, automobiles, appliances and other less durable goods have translated to increased spending in 2013,” noted John Morris, leader of Industrial Services for the Americas. “As corporations respond, we have seen a jump in demand, especially for distribution space. With the continued ecommerce boom, online retailers have become the fastest-growing segment of warehouse occupiers. At the same time, traditional brick-and-mortar retailers continue to drive demand as well, with companies like Walmart and Home Depot among the most active.”

This mirrors the Jones Lang LaSalle’s (JLL) first Big Box Velocity Index, which maintains that the demand for U.S. industrial distribution centers, larger than 300,000 square feet (known as “big box” space) is high and rising.

Industrial leasing volume increased in the third quarter and strength is broad based, though Southern California, Dallas and Chicago were particularly strong. Greater Los Angeles continued to lead the nation with 28.1 million square feet leased year-to-date, followed by Chicago with 24.4 million square feet. Twelve of the 37 markets tracked by Cushman & Wakefield have reported increased activity in 2013, including 11 that experienced double-digit annual increases. Northern New Jersey posted a 37.0 year-over-year leasing increase, while Dallas/Fort Worth recorded a 28.2 percent increase.

This performance contributed to the nation’s overall vacancy rate falling to 7.8 percent in the third quarter, down 70 basis points from a year ago and 300 basis points lower from its recent peak in first quarter 2010. This is the lowest industrial vacancy rate since second quarter 2008. Only six out of 37 markets tracked reported increased vacancy year-over-year. Meanwhile, Boston recorded the largest decrease in vacancy, down 510 basis points.
“Consequently, industrial rental rates have been trending up steadily,” Morris said. “Net demand also is up 30 percent from the same period a year ago, with only two of our 37 markets recording negative absorption.” California’s Inland Empire leads the nation in occupancy gains, with 10.2 million square feet of absorption, followed by Dallas/Fort Worth, with 9.5 million square feet.

Within this context, Morris noted that new industrial construction levels continue to rise, including a significant amount of speculative product. Construction completions totaled 39.6 million square feet through the third quarter, already surpassing 2012’s year-end total of 35.6 million square feet. Speculative construction accounted for 55.2 percent (21.8 million square feet) of this total. An additional 15.0 million square feet of spec development is scheduled to be completed by year-end.

“Construction has become prevalent in the nation’s high-demand industrial hubs,” he said. “We expect this trending to continue, especially in port and intermodal markets.” The Inland Empire leads the nation in construction activity for 2013, with 16.4 million square feet currently in development, followed by the I-81/I-78 Corridor, with 8.3 million square feet.

“In general, the short-range view of the industrial sector is quite positive,” Morris said. “Barring any additional unforeseen obstacles – like another government shutdown –increased consumer and business spending will likely continue to push the economic recovery forward into 2014.”