How Flood of Industrial Space Will Impact Rent Growth

MIAMI—It was standing room only at the Viceroy in Downtown Miami on Tuesday morning at RealShare Industrial. Commercial real estate industry icons gathered to discuss what's next in development and leasing and a look at the year ahead.

One key question was around the millions of square feet of industrial developments coming online in Miami in 2013 and 2014 and how that would impact pricing. Although the general consensus is that now is a good time to develop, it could delay a full pricing recovery.

Peter Crovo, vice president and market officer at Prologis, pointed out some quick stats. About a year ago, industrial vacancy rates were roughly 7% in Miami-Dade County. That hasn't changed much year over year. But what has changed is the volume of development.

In 2012, for example, there was roughly 350,000 feet of delivery. By way of comparison, 2013 will see about 1.5 or 1.6 million of delivery—and so will 2014. That's a volume of industrial space that surpasses the office glut that hit the Downtown Miami and Brickell market during the downturn in 2010. Of course, we're no longer in a downturn.

“From 2010 to 2012 we saw the fewest construction starts in the past 60 years,” Crovo says. “The buildings that were delivered in the last cycle are now five to seven years old. So we think it's a good time to start developing.”

Indeed, but even though some of the industrial development that's hit the market this year has already been leased, Amy Curry, a senior vice president at IndCor Properties, has noticed a trend that could impact pricing: Most of it is geared toward larger users of 75,000 feet or more.

“While there is demand out there for that type of space, I'd say the bread and butter is the 15,000 to 30,000 square feet,” she says. “As this product delivers, I think it will be interesting to see in 2014 where the rates hit for a 100,000 deal shopping the market.”

Curry predicts Miami's industrial market will be hard pressed to post rental growth that compares to similar deals in 2013. That's because some of the supply will need to be absorbed before that market starts to see rent growth.

“In Miami you are already seeing rent growth in the smaller sizes,” Curry says. “As new supply comes online it will be interesting to see how the market may soften for a year or so.”