From the February/March 2013 Issue of Real Estate Forum
Spec Industrial Space Starting Up Again
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Particularly in fourth-quarter 2012, the industrial sector saw a definite uptick in demand. For the fourth quarter of 2012, net take-up of industrial space in the US was at 40.8 million square feet, according to a report from Cassidy Turley. That’s not only up from 27.5 million square feet in Q3, it also marks the second-strongest quarter since the firm began tracking the market in 1993. In the past two years alone, 205 million square feet of warehouse space was taken up, more than making up for the 145 million square feet that was lost to the recession.
Much of the demand is being led by big-box product, which began mushrooming across the country after the worst of the recession passed. Within that category, a sea change is occurring from old-school pick-and-pack warehousing and distribution models to high-tech, automation-heavy facilities requiring skilled workers and engineers. This change has largely been driven by rising online retail sales and the need for manufacturers and retailers to move merchandise quickly from distribution centers directly to consumers’ homes.
Brokers say this robust expansion has been fueled by consumers putting pressure on retailers in all sectors to deliver ordered merchandise quicker than ever. According to one Jones Lang LaSalle report, “One-third of all demand for big-box space is tied to multi-channel retailers or ‘e-tailers.’”
Adds Steve Schwegman, an Indianapolis-based senior vice president of Jones Lang LaSalle who specializes in industrial brokerage, “Now, when people want their product, they want it today.” And although well-established logistic hubs like Chicago, New Jersey and the Inland Empire will remain healthy in 2013, “Indianapolis, Memphis and markets like Columbus and Cincinnati will benefit most from that consumer trend.” Their central location, access to a vast interstate road network, air cargo hubs and proximity to other major population centers have attracted a flurry of developers, including speculative ones.
As a result, speculative building has boomed. In Indiana, for instance, Browning Investments/Prologis had just finished a 622,440-square-foot speculative structure in Plainfield when pet supplier Hartz Mountain Corp. quickly signed on as the sole tenant. “The developer was bullish on the market,” Schwegman said, “and put blind faith in the ‘build-it-and-they-will-come’ mentality. We’ve got a full building now and I think we’re going to see a lot of that this year.”
According to Colliers International, Indianapolis alone is expected to receive 2.1 million square feet of spec industrial development in the first half of this year. Vacancy is expected to increase, but only fleetingly; the firm expects “robust leasing activity and true net absorption of these speculative modern bulk spaces.” The pace of absorption should lead to even more spec building in 2014.
The national outlook for big-box distribution should also brighten in 2013. A recent Jones Lang LaSalle study found that “the balance of power currently favors owners as tenants’ options dwindle and new development comes on line at an increasing pace. This year will be a crucial test of whether the market can stay in the balance it has found.”
The average-size industrial-warehouse property being delivered is increasing from a couple-hundred thousand square feet to 700,000 or 800,000 square feet, thanks to e-commerce. Craig Meyer, international director and head of the logistics and industrial services group at Jones Lang LaSalle, says, “The ability to fill an order with multiple SKUs is a scientific process these days,” he says. “It’s an indication of the level of sophistication in these buildings and the need to drive lowest costs.”
In the Western part of the US, industrial vacancy is shrinking, particularly quickly in certain submarkets. Industrial is the darling among real estate classes in the greater Los Angeles region, according to speakers at the recent Annual Real Estate Market Review and Forecast event held in Downtown Los Angeles and presented by the AIR Commercial Real Estate Association. Industrial real estate performed better in LA than in any other region nationwide and is also the strongest category of commercial real estate in the four-county region itself.
Industrial recovery is reaching more areas of Los Angeles and Orange counties as well as the Inland Empire, according to a recently released report, “The 2012 Casden Industrial and Office Forecast” from the University of Southern California. The study, which analyzes economic data through the third quarter of this year, is provided by Newmark Grubb Knight Frank, and focuses on rents, vacancies and transactions for office and industrial markets in Los Angeles, Orange, Riverside and San Bernardino counties. Twelve out of 14 industrial submarkets saw growth in occupancy, while 10 industrial submarkets saw increased rental rates.
The sector’s improvement hasn’t escaped investors’ notice, either. According to Schwegman, “You’ve now got investors clamoring to get their hands on product. Three years ago, they were asking for a cap rate of 9% and today they’ll accept below 7%.”
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