CHICAGO—The US and Canadian industrial markets continued to improve in the past year, with user demand pushing down vacancy rates in almost every market and swelling the development pipeline in a far smaller group of regions, according to Avison Young's Spring 2015 Canada, US and UK Industrial Market Report, released earlier this week. The company's experts also believe that the sector will continue growing steadily in 2015. Volatile energy prices remain an unknown factor, but should only impact particular markets and industry sectors. And new development, although steady, will remain relatively modest in many markets.

“It's low, and this is indicative of a development market that is being tempered by the need for real equity,” Erik Foster, principal and practice leader of Avison Young's Chicago-based industrial capital markets team, tells GlobeSt.com. Prior to the recession, developers could sometimes launch a project after kicking in only 10%, but today much more is required, and “it is causing a lot of developers to be more strategic.”

Industrial developers in Canada and the US had more than 117 million square feet under construction at the end of the first quarter. Although this is a relatively healthy amount, Foster points out that in the peak year of 2007, that number was 220 million. Distribution centers make up the lion's share of current construction, and will support the growing supply-chain networks of companies like Canadian Tire, Walmart, Home Depot, FedEx and Hyundai Mobis in Canada, and Amazon.com, Cardinal Health, Midwest Warehouse & Distribution Systems, Southern Wine and Spirits, and ALDI in the US.

US developers have almost 100 million square feet under construction, a 16% increase compared with the same period in 2014. Nearly every Avison Young market in the US reported some level of industrial development, but 78% of the total space was concentrated in seven markets.

“That statistic does not surprise me,” Foster says. It merely illustrates how important vast, modern distribution facilities have become, and that the demand for this product is concentrated in several key distribution markets. West Coast powerhouse Los Angeles reported a sub-4% vacancy rate, for example, its lowest level in more than a decade, and has 18 million square feet under construction – more than the entire Canadian market. Meanwhile, developers in the Atlanta region have 17 million square feet under construction, half of it on a speculative basis.

Foster expects sustained development in most markets throughout 2015, but it should also remain skewed to major distribution markets.

This report was Avison Young's second on the Canada-US industrial market, and the firm has expanded its coverage from 35 to 43 markets. Canadian regions typically have vacancy rates in the low single-digits, but in the first quarter, all but one of the US markets covered by the report finally sank into single-digit territory.

According to Avison Young, of the 42 industrial markets tracked, vacancy declined in 32 markets, increased in eight, and remained unchanged in two, during the 12-month period to the end of the first quarter of 2015. The Canadian market reported a vacancy rate of 4.4%, a drop of 20 bps, compared with 6.9%, a drop of 90 bps, in the US.

The average asking rent for industrial properties in the US increased by a relatively modest $0.40 per square foot since the first quarter of last year. Still, according to Avison Young, “this belies the fact that every market, with the exception of Miami, posted increased rents, and most have strengthening deal terms.”

And the tightening of markets, combined with the relatively modest level of new construction in most regions, should continue pushing rents up. “There will be rent growth across all asset classes in industrial real estate,” Foster says, with modest increases of about 1-2% in many markets and as much as 5-8% in the tighter markets.

The highest reported rents were again on the West Coast: San Francisco at $14.54 per square foot; San Diego County at $11.64; and San Mateo at $10.44. This was expected since all three markets have strong demand drivers along with high barriers to entry and vacancy rates in the low single digits.

Other notable findings from the first quarter included the progress made in Detroit, where the recovered auto industry pushed down the vacancy rate by 170 bps year-over-year to 8.4%. And driven by owner/occupier demand, vacancy levels in Las Vegas fell to 8.5% from 11.1% one year prior. In addition, the 1 billion square-foot Chicago market has begun shifting to landlord-friendly conditions, with vacancy falling by 110 bps year-over-year, and has nearly 9 million square feet under construction.

“Industrial market fundamentals showed meaningful improvement across the US in the last year,” says Earl Webb, Avison Young's president, US operations. “Lower energy prices are supporting consumer spending and non-energy warehouse and distribution growth, with key cities reporting build-to-suit and speculative development. At the same time, the lower energy costs and continued low interest rates are fuelling increased auto sales, so manufacturing and parts production should also accelerate this year.”