With a national vacancy rate in the single digits and a steady call for space from tenants, it's no wonder there's a flood of industrial development in the works. But there's a downside to every upturn, and a healthy market inevitably leads to increased competition, particularly when it comes to available land.

"There is a surge of new construction across the country, with everyone from the major national developers to the strong regional and local players active right now," states Whitfield Hamilton, Eastern regional partner for Panattoni Development Co. in Nashville. "The economy is good, and Fortune 500 firms down to smaller companies are growing their businesses and need more space."

A thriving economy is just one of the forces spurring the building boom, note the experts. Also in the market's favor are rising corporate profits, strong employment gains, continued supply-chain reconfiguration, increasing international trade (notably from the Pacific Rim) and an abundance of capital earmarked for industrial plays."Institutions like this product type and want it in their portfolios," relates Matt O'Sullivan, executive vice president and chief development officer at IDI in Atlanta. But so does everyone else, making acquisitions of existing product highly competitive. "You have investors trying to get deeper into the development cycle to gain industrial product, and they are willing to take on more risk to do that."

Just how flush is the industrial pipeline? According to Northbrook, IL-based brokerage firm Grubb & Ellis, approximately 110 million sf of fresh product was under way at the end of March. This figure, which is equivalent to 1.1% of the total national inventory, is the highest recorded in more than four years. Absorption topped out at 42.9 million sf, significantly outpacing the 20.4 million sf that came on line in the first quarter. Consequently, availability fell to 8%, the lowest level since the third quarter of 2001, Grubb reports.

"The industrial markets have been in recovery for the past two to three years," observes Eugene F. Reilly, executive vice president and president of North America for AMB Property Corp., a San Francisco-based industrial REIT. "It has been a slow but steady recovery, at least in terms of the fundamentals. One noteworthy piece of data has been the supply. Demand has progressively moved up, and last year we had record absorption. However, new product deliveries have been at 50% to 60% of what is typical for a recovery year. We are seeing less space coming onto the market."

And when it comes to regional distribution facilities being constructed closer to population centers, "we are seeing more pushback from residents," the executive continues. "Frankly, industrial projects have a relatively low tax base, and you have a lot of truck traffic. In many cases, the community wants office or retail because of the building's appearance and tax revenues."

But the primary issue, say market watchers, is the dearth of available land, which has been a problem for all developers in recent years. "The competition for land is higher than it has ever been," says O'Sullivan. "We are building to the capacity that we are able to, but a lot of markets are land constrained."

The situation has been especially tough on industrial builders, who are often outbid by residential developers and others for acreage, including industrial land that can be rezoned for different uses. "This forces industrial developers to get creative or push out from the center of the city another exit or two," the IDI executive relates. "We fight a constant battle to find opportunities that make sense economically and where we can get the land into use on a timely basis.

"The price of land has escalated and a lot of the terms and conditions involved in buying it have changed," O'Sullivan continues. "You are often taking on sites that are not fully entitled or zoned. Today, you are buying land with a lot more unknowns."

In some places the increase in land prices can be substantial. Take California's Inland Empire. Costs there have doubled in recent years and in the past 18 months have jumped another 50% or more, according to AMB.

Furthermore, rental rates have not moved up to meet these growing expenditures. "There are only certain markets around the country where we have started to see some rent increases," says Hamilton.

Grubb & Ellis data anticipates that any further rent hikes will be modest because of such factors as high construction and land costs, difficult entitlement processes, the removal of older properties through redevelopment, increasing interest rates and rising energy prices.Escalating building costs are spurring developers to get more creative. Some of the options being explored include repositioning plays as well as purchasing older product strictly for the site underneath it.

"Land is getting so expensive that building tear-downs are occurring more often," says Reilly of AMB, whose portfolio spans some 11 countries and 118 million sf, with 12.4 million sf now in the pipeline.

Areas where the battle for land is most pronounced are the hot port markets. Sites are becoming a rare commodity, and any acreage that's available doesn't come cheap. "It's a real race to find and purchase land," says Whitfield Hamilton of Panattoni. "You see incredible competition in the port cities. Everybody is trying to make a logistics play up and down the East and West Coasts."

For a company like AMB, which focuses on transportation-oriented projects and regional distribution centers, Southern California is an important market. "It has multiple demand drivers," Eugene Reilly points out, citing the thriving port activity as well as the region's large—and growing—population base. The firm's holdings there have grown from 16.7 million sf at the end of 2003 to 17.9 million sf in the first quarter of this year.

But Southern California is a prime target for many developers, and to operate there effectively, a firm has to have someone on the ground, he stresses. "It is almost impossible to be successful in Los Angeles without a real local presence, so you can parachute in, tie up some land and move forward," the EVP relates. "We have found that our LA office is critical to maintaining that pipeline.

"We bought just under 100 acres of land in the Inland Empire specifically to build large floor-plate regional distribution product," Reilly adds. "We have a project going up right now that's 700,000 sf. We also have done a couple of redevelopment deals, in which we bought existing buildings near the Port of Los Angeles and the airport. We have either rehabbed the building or torn it down and built new product in its place."

Though developing industrial facilities has become more challenging, it is counterbalanced by strong user demand. Everyone, from retailers to logistics firms, is shopping for space, report the executives. "We have seen a ton of activity from freight forwarders, integrators and supply chain companies," says Reilly, "and that activity is related to global trade, which is growing at three times the GDP. We are also seeing a lot of consolidation going on with some of our customers."

In fact, demand is so strong that most new projects today are being done on a speculative basis. According to Cushman & Wakefield, approximately 70% of the 28.4 million sf completed across the US during the first quarter was spec space.

"We are seeing another generation of spec space coming out of the ground in most of the distribution markets," says Hamilton. "The competition for build-to-suit business is extremely tough. Those are very thin deals."

But there are a quite a few of them getting done. Panattoni expects to have approximately 18 million sf in the works this year, about the same as 2005. "Part of what we are doing," Hamilton relates, "is making sure that we are leasing up what has been built in the previous cycle."

With an abundance of new product on the horizon and much of it yet to be leased, the executives say they are keeping watch for the possibility of overbuilding. "Certain areas always have a tendency to get a little overbuilt because they have a lot of land or people playing in the market," observes O'Sullivan. "You have to review every project that comes through your pipeline to make sure that it is prudent at that point to develop."

Hamilton says the current steady rate of absorption should serve as a guard against oversupply. "We watch each individual market carefully, and there is always that risk with the amount of capital that is out there," he says. "But demand is there and the economy is strong." So is he concerned? "Right now, no."