John Morris of C & W

CHICAGO—The US industrial real estate market continued to make progress through the first quarter of 2014, showing robust absorption, declining vacancies and rising rental rates, according to commercial real estate services firm Cushman & Wakefield’s just-released research findings. Supply tightened in many markets, contributing to a leasing slowdown in January, February and March, but developers have ramped up production of industrial assets to meet the strengthening demand.

“First quarter performance continued the notable progress industrial real estate experienced in 2013,” said Cushman & Wakefield’s John Morris, the Rosemont, IL-based leader of industrial services for the Americas, in a prepared statement. He was not available for further comment before deadline. “Domestic manufacturing continues to gain traction, driving increased production and shipments, and electronic fulfillment continued to expand. As a result, the economic environment for our sector is the best we have seen in many years.”

Industrial space occupancy gains rose 31% year-over-year, with 30.5-million-square-feet of absorption, compared to 23.2-million-square-feet in the first quarter of 2013, the C&W data show. The Atlanta metro area led the nation, with 5.1-million-square-feet of absorption, followed by the Inland Empire, with 4.6-million-square-feet. The national industrial vacancy rate continued sinking, and ended the quarter at 7.4%, 80 bps lower than one year ago.

“Availabilities are dwindling, especially in the highly competitive big-box market,” Morris added. “This is holding industrial leasing in check. Only 11 out of the 38 markets tracked by Cushman & Wakefield posted increased activity year-over-year.”

Greater Los Angeles once again led the nation in leasing volume, with 7.7-million-square-feet in activity through March, although that was a 16% decrease from last year’s first quarter. The Dallas/Fort Worth area came in second with 6.8-million-square feet, a 13% increase. Seven markets posted double-digit gains during the first quarter, with Northern New Jersey up 43% over last year, and Philadelphia up 74%.

Users continue having difficulties finding top-tier industrial space, and that has pushed up rents. Average asking rates increased in most of the major markets tracked by Cushman & Wakefield, with the direct average climbing from $5.73-per-square-foot to $6.03-per-square-foot since last year. Houston topped the list with a 10.3%average rent increase.

“The supply/demand imbalance also continues to fuel construction activity, including both build-to-suit and speculative product,” Morris noted. “Virtually all of the top markets are seeing construction pipelines return to near pre-recession levels.”

Developers in the Dallas/Fort Worth area and California’s Inland Empire lead the nation in construction, with 16.5-million-square-feet and 14.8-million-square-feet of total volume, respectively. Significantly, in Dallas/Fort Worth, developers are doing 14.4-million-square-feet of that total on spec. C & W expects developers to complete 85.8-million-square-feet by the end of the year, with 51.7-million-square-feet on spec.

“Moving forward, we are watching a number of private sector developments that will likely add near-term momentum to the industrial real estate market’s positive trending,” Morris said. “Among them, we anticipate a continuing revival of the housing sector, the activation of pent-up consumer demand and rising export volume. Most importantly, we are beginning to see a shift in business attitudes and a greater willingness to take risk, which will lead to stronger employment growth and increased investments in people and equipment.”