Data recently released by CBRE in the February edition of its “Americas Industrial & Logistics Trends Report” points to ongoing industrial real estate expansion throughout most parts of the Americas.
The report’s myriad data points, which are based on feedback from more than 950 CBRE brokerage and investment professionals, highlight the current state of the industrial real estate market, which continue to hit, or approach, all-time highs for certain benchmarks, including:
In an interview, David Egan, CBRE head of industrial and logistics research in the Americas, explained that while net absorption is down, it is really a byproduct of a tight market as there are so many users looking for space.
“Things are very tight with so little vacancy available,” he said. “Demand really has not gone away, but the ability to meet demand has become an issue in some markets. It is something we need to keep an eye on, because when users leave a market it is an indication of a problem, so this lower number indicates all users are still looking for space, it is just that vacancy rates are so low that they are unable to find a deal or just postponing a decision. This is what happened in some cases around the election, but the number of deals our brokers are working on has not really changed.”
What’s more, he explained that 2017 marks the ninth year of an expansion cycle even with these building constraints.
The gain in the net rent index continues and ongoing trend of rent growth, with CBRE noting that rents have gone up by 1-to-1.5 percent per quarter and this increase is in line with what was expected. And even though over all activity has gone down a bit, Egan said the deals that we done “were so incredibly competitive” even with an over all supply and demand imbalance with landlords able to raise rent significantly.
“I was a bit surprised with the net absorption number, as my expectation was that the fourth quarter was going to be huge, with heavy user demand,” he said. “Even with a bit of a pull back, the full year was very strong. There were some other forces at play, too, with the third quarter being massive as deals made in the third quarter may have spilled into the fourth quarter, which could have evened things out. But as far as rental growth and declines in vacancy, things came in at more or less what we were expecting.”
From a U.S. tenant and user perspective, CBRE observed that e-commerce, 3PL, and food &beverage tenants are still dominating user demand in most markets. And it also found that due to very low U.S. unemployment rates, occupiers are concerned about the availability and cost of labor, which is a major factor in location decisions. Another factor cited by CBRE was that there have been 27 consecutive quarters of positive net absorption, which has raised occupancy to 95.1 percent for its highest level going back to when CBRE Econometric Advisors first started tracking it in 2002.
“The dynamics on the ground are the same as they have been for a while,” he said. “E-commerce is really a big factor, and while a huge driver it still represents less than half of total deal flow at around 30 percent. E-commerce players have a preference for big box and high-cube facilities, but there definitely has been an increased preference for smaller, closer in last-mile-type facilities closer to the last touch of a package, which means being closer to the customer and also means a smaller building. We are seeing greater activity in that area. Big box is still the majority of demand, but it is not the massive majority like it was a couple of years ago. It is interesting to see how diverse the demand has become in terms of the specs and location of buildings. It is definitely not a big box, big market cycle anymore. It is a more diverse and widespread cycle.”
From an investment perspective, CBRE said that U.S. industrial investment in Q4 came in at $17.3 billion, which marked the highest quarter of 2016, with the full-year total at $59.2 billion for its second highest tally since 2007 although it was 24 percent the record set in 2015.