Industrial real estate market remains in solid shape in 2016, reports JLL

When it comes to the current state of the industrial real estate market in 2016, it stands to reason that the times are not necessarily changing, at least when compared to 2015. That was a major takeaway of recent research issued by Chicago-based industrial real estate firm JLL.

With things not changing materially from 2015 to 2016, the data presented in JLL’s research continues to tell a positive story for the industrial real estate market, including:
-how U.S. industrial vacancy at 6.3 percent is at a 15-year low and is lower than the previous cycle’s low point of 7.4 percent in 2007;
-U.S. warehouse asking rents are expected to increase for the sixth straight year, with the current average asking rate at $5.01 per square foot on an NNN (a triple net lease is a lease structure where the tenant is responsible for paying all operating expenses associated with a property) basis and average rates pegged to rise 4.5 percent;
-78 percent of U.S. industrial net absorption activity in Q1’16 was dominated by move-in’s into facilities that were built in the last 27 months; and
-U.S. industrial vacancy is expected to hover in the low 6’s in 2016: Absorption will almost certainly outpace new supply additions (even with 131 million sq. feet of new spec construction coming online in 2016)

“We are looking at 2016 to be a lot like 2015 in that we have had a real continuing steady and positive absorption, with the Q1 numbers showing 51 million square-feet in net absorption compared to 49 million compared to last year,” said JLL President, Industrial Brokerage, JLL Americas Craig Meyer. “Things that are driving that include a slow growth economy, and the industrial real estate markets to begin with were not that bad off and we have seen a continuing drop in vacancy.”

Two underlying themes that influenced this data cited by Meyer include a reset of the U.S. supply chain, which has seen major growth in direct-to-customer, or Internet, sales, along with the replacement of traditional distribution centers.

The growth of direct-to-customer over the last seven years has been spurred by e-fulfillment, which Meyer said has been driven by the replacement of the distribution center, which was taking product from a warehouse to a store, whereas a fulfillment center is taking product directly to the consumer, or the “Amazon effect.” Meyer explained this is permeating throughout the entire retail sector, with the shrinking retail footprint is growing the industrial footprint in the U.S.

“This is starting to influence retailers’ Internet strategy in the U.S.,” said Meyer. “It is a paradigm shift that is going on. And as buildings have grown in size in this particular cycle, they have gone from 500,000 square-feet to 1 million square-feet and have become very significant institutional grade investments. We are not close to being overbuilt today. If you look at what forecasted demand is, it exceeds actual construction by a wide margin across the U.S. That continues to show a market that has positive equilibrium, with the laws of supply and demand in effect, rental rates growing, an acceleration in overall rental rates, with some markets up 10 percent annually.”

A major implication of current market conditions for occupiers, in the form of shippers and 3PLs, as outlined by JLL, is that they need to forecast and get ahead of the market as early as possible, and with rates heading up acting sooner rather than later will provide them with a real estate advantage, with market conditions not expected to materially change in the near term.

While consumer confidence levels have been trending positively of late, Meyer said a key metric tracked by JLL is the Institute for Supply Management’s PMI, the key metric for the ISM’s manufacturing data.

“This is really an indication of capital spending, and that has been slightly off,” he said. “It expresses cautiousness, as evidenced by the stock market which was down a lot earlier in the year and is now slowly coming back. There are also things like low oil prices and this very confusing election year. Any number of things could happen. The Fed remains committed to keeping interest rates low, too. We don’t really see real change in anything in 2017 at this point.”

Looking at specific U.S. markets, Meyer said there is “big absorption in Southern California in the Inland Empire, as well as in parts of Texas, the Northeast, and in Atlanta. And he said there are big rental increases in Seattle, the East Bay area of San Francisco, and southern Florida, which Meyer said are highly supplied and constrained markets with very little land.