LOS ANGELES-According to a CBRE Group industrial report, speculative industrial development will become more attractive in 2014 due to rising rental rates, which are expected to increase by 4% this year.
During the recession, speculative building had declined as national rental rates for industrial properties dropped 20% on average. The result was the most dramatic decline in industrial development in the sector’s history. At the low point in 2009, national industrial development fell to 81 million square feet, a 60% drop. The chart below shows the history of rental growth in the industrial sector.
According to Jared Sullivan, CBRE senior economist and the author of the report, real rental rates are the most important factor in forecasting new construction growth. Currently, some markets are reporting full recovery with availability rates at that of prerecession levels while larger markets, like Detroit and Denver are reporting lower availability rates than before the recession.
With the successful growth in 2013 and strong demand drivers still in place, Sullivan anticipates industrial demand will remain strong in 2014, making developers more confident. He expects that national new construction in 2014 will exceed 100 million square feet for the first time since the recession. Although that is great news, it is still low compared to historical industrial construction rates. With some smaller markets still struggling, real rent levels overall don’t warrent the kind of major speculative development that took place pre-recession. Once the smaller markets recover as the larger markets have, construction will start to climb back to pre-recession highs.