CBRE data points to ongoing limited real estate availability

When looking at the state of United States industrial real estate availability, data from commercial real estate firm CBRE really puts into perspective just how tight space is these days.

Really, it is not just “these days” to be sure. Based on CBRE’s “Industrial Availability Index,” which was issued this month, industrial real estate availability has now fallen for 27 straight quarters, decreasing 8.2 percent in the fourth quarter, a decline of five basis points from the third quarter’s rate of 8.7 percent. Availability is defined by CBRE as “all space listed as available for lease, including both vacant space and space currently occupied but marketed for sublease.”

If those figures don’t sell you on the state of this market, consider these then: the fourth quarter’s availability rate is its lowest going back to the fourth quarter of 2001; and for the 64 major U.S. markets CBRE tracks, there were industrial availability declines in 40 of them, with 24 seeing increases.

While the industrial real estate availability rate fell again, it did not match up with CBRE’s average quarterly decline of 25 basis points over the last six years. The firm attributed that to what it said is likely a function of growing supply instead of declining demand. 

The report stated that although the global economic and geopolitical environment remains uncertain, strong domestic fundamentals, including a tight labor market, stronger wage growth, and resilient consumer activity, all bode well for the industrial real estate sector.

Some other notable data included in the report showed that asking rates for net rents hit an all-time high of $6.58 per square foot per year in the fourth quarter, and another one showed that the firm expects that developers will have completed construction of around 179 million square-feet of industrial space in 2016 in the myriad markets tracked by CBRE (when final figures are compiled).

CBRE Chief Economist for the Americas Jeffrey Havsy explained that industrial space demand has consistently outpaced new supply going back to the second quarter of 2010.

And he said that the market is still solid for demand while supply is finally catching up.

“We’re not expecting availability to end up rising dramatically,” Havsy said. “Rather, it ultimately will remain in balance. As supply and demand continue to equalize, we’ll see rent growth start to flatten out.”

As for 2017, CBRE said it expects to see greater parity between completions (supply) and net absorption (demand) in 2017, explaining that with the development cycle expected to remain steady for the next few years, the availability rate is expected to inch closer to its trough as new supply comes online and upward pressure on rent levels is likely to decrease.

On a historical basis, CBRE said that whenever completions have consistently totaled around 50 million square-feet per quarter, the availability rate has flattened out for a period before increasing. And while completions have not consistently been at that level, CBRE said that higher completion numbers in the coming quarters, coupled with greater parity between completions and net absorption, will likely lead to availability falling more slowly before flattening out.

Havsy told LM in a 2016 interview that it comes as no surprise that there are few signs of stress in the industrial market’s fundamentals, despite an uncertain economic and geopolitical outlook.

Reasons for this include things like strong job growth and decent retail sales data, with the economist saying “the headlines are much worse than the data. The economy is in good (not great) shape.”

But should the economy tail off, Havsy cautioned that rent growth would in all likelihood slow down in tandem with the economy.

The ongoing advent of e-commerce has, according to CBRE, pushed industrial availability to what it described as “unusual lows” as demand grows for facilities to be equipped to handle same-day delivery fulfillment and reverse logistics, too. And coupled with the strong U.S. dollar compared to other currencies, which it expects to continue to increase U.S. imports, CBRE noted that is expected to drive additional demand for industrial real estate space. 

When asked if the ever-increasing rental activity by e-commerce occupants is surprising in any way or if it is viewed as the “new normal” at all, Havsy said that like all things real estate, rents will not grow forever.

“Cycles do appear longer and demand less elastic than the past,” he said.  “As tenants put more expensive and complex systems in warehouses, they are less likely to move to save ’ a nickel’. This stickiness causes demand to be more inelastic and allows landlords to raise rents quicker than in the past. That being said, real estate is still cyclical and the fundamentals will change. This will cause rents to stop growing or even decline as they have in every other previous cycle.”

While fundamentals will change at some point, things appear to be robust when it comes to industrial real estate availability, something that appears to remain intact for more than a little while, especially with the last 27 quarters serving as evidence.