JLL says logistics properties playing a role in industrial real estate market recovery

Even though many facets of the industrial real estate market are not close to a full recovery, one area in which appears to be growing are markets with strong logistics infrastructure that serve as distribution hubs to regions with large populations, according to a report issued by global real estate firm Jones Lang LaSalle (JLL).

This observation coincides with the national average vacancy rate for the North American real estate sector remaining close to flat at 10.4 percent in the third quarter of 2010 compared to a 10.6 percent rate in the second quarter.

But even with vacancy rates remaining consistent, JLL observed that current economic conditions are still hindering industrial real estate market conditions, with expectations for overall activity likely to be slow.

“I would characterize the U.S. industrial real estate market as one of cautious optimism,” said Craig Meyer, SIOR, Managing Director and Leader of JLL’s Logistics and Industrial Services Group. “It looks like there will be positive absorption by the end of 2010 nationally, which is big as there has been negative absorption over the last three years.”

Net absorption in the third quarter of 2010 was at 9.3 million square feet, marking the second quarter of occupancy gains, according to JLL data.

In the report, JLL explained that there is a continued “flight to quality” but as the larger blocks of prime availabilities continue to be taken down, there is the potential for increased build-to-suit activity occurring in key logistics hub markets around the country.

These markets, noted JLL, are benefitting from higher demand from national and corporate industrial occupiers, with firms consolidating into new prime locations establishing new supply chain directives when costs are low or those companies are able to trade up with a well-timed lease event.

The result of this activity, said Meyer, is a slow but steady recovery in industrial markets led by Tier I—or large logistics hub—markets in various regions, including Southern California and its Inland Empire, Harrisburg and Lehigh Valley in Pennsylvania, and an improving market in Chicago.

“These are the large logistics and coastal markets that are driving the good news,” said Meyer. “The Inland Empire in particular has been really dependent upon the Port of Los Angeles, and inbound port traffic there is up significantly over a cyclical low. And retailers have restocked in response to a recovering economy. We are not at a plateau, but we are not growing quite as fast as we were in the third quarter, but we are chugging along which in the long run is really good news.”

Despite the growth occurring in some regions, industrial rents dropped 1.2 percent in the third quarter for the tenth straight time since early 2008, and it is likely to continue across smaller, regional markets into 2011.

This reflects what Meyer described as a bottoming of rental costs nationally, with some increases—depending on the market—possible. And for occupiers of industrial properties, Meyer said the window is still open to secure space, with relatively low lease rates available compared to historical standards, due to the nature of the slow economic recovery, and is likely to be the case for a while contingent on the size of the building.

Direction of the recovery: While the initial economic recovery was driven by improvements in the manufacturing sector and a cyclical adjustment in inventories, it is now more broad-based, with a slowing inventory re-build in terms of its impact on the industrial property sector, according to Meyer.