LOS ANGELES—The national industrial market is continuing to expand, according to the 2Q14 industrial report from Lee & Associates, which GlobeSt.com has exclusively. Compared to the same time in 2012, vacancy rates have fallen to 7.8%, from 9.4%, as net absorption and gross absorption have been trending up for the past two years.
Industrial development is concentrated in the markets with the most available land, and, for that reason, will continue to grow at a faster pace than infill markets. This is something we have seen here in Southern California, where developers are snatching up the last remaining plots of developable land in infill markets, like the recent REDA Bascom Ventures project launched in the City of Industry. Contributing to slowed growth in infill markets, some cities are encouraging developers to redevelop older industrial areas for multifamily and retail projects. The combination has led to a shortage in quality industrial properties, leaving many users to either settle or wait for a developer to augment the supply.
The report outlines the economic conditions that contribute to this growth to offer a more robust outlook. According to Lee experts, GDP growth has been the “primary benchmark” in determining economic health. For a recovering economy, GDP growth is currently far below that of growth in other recovery cycles, sitting at about 2% and leaving a lot of uncertainty in the market. However, energy production, specifically technology that reduces natural gases and oil, have created an energy boom that has a positive affect on GDP growth, and will alternatively help to grow industrial expansion and space absorption.
Monetary policy was also one of the primary factors Lee noted has a significant impact on industrial growth, especially considering the Quantitative Easing policy enacted by the Fed, which has added $4 trillion to the balance sheet. There is some fear that this program could propel an inflation cycle when phased out, which could cause mortgage rates to rise and put upward pressure on cap rates. However, if the program can be phased out without provoking inflation, industrial lease and sale activity could accelerate, and even the threat of inflation may boost industrial sale activity, according to the report.
The report also covered the top US industrial markets in the major US regions, which include Central Los Angeles, San Diego, Phoenix, Dallas/Fort Worth, St. Louis, Chicago, Atlanta, Orlando, Baltimore and New York. All of the markets are experiencing declining vacancy rates and all expect for New York are experiencing increased net absorption rates. In a forecast, the report shows that vacancy rates will continue to decline with absorption slowing due to a lack of supply. Additionally, rents will continue to rise moderately.
We plan to update this story with more specific market coverage soon.