Industrial's Continued Outlook: Strong Leasing

SEATTLE—The third quarter marked another chapter in the ongoing success story of the industrial sector across the US and Canada, and Colliers International doesn't see the sector losing its mojo anytime soon. With a 21-basis point decline in vacancy during Q3—to 7.5% in the US and 4% in Canada—and with the quarter's 64.8 million square feet of absorption representing the second-highest quarterly tally since the recovery began, clearly the momentum is there.

And so it will continue even as more new product comes on line, Dwight Hotchkiss, national director of industrial | USA for Seattle-based Colliers, tells GlobeSt.com. “Although the rate of construction will increase in 2015, we predict strong, positive absorption,” he says.

“The second half of 2014 has seen a visible increase in activity for product between 50,000 and 250,000 square feet and, along with anticipated demand in big box, will drive the absorption numbers," adds Hotchkiss. Regionally, the strongest markets for absorption in both Q3 and year-to-date included Chicago, Dallas-Fort Worth, Atlanta, Los Angeles and the Inland Empire, Houston, Indianapolis and Stockton/San Joaquin County, CA.

Colliers' Q3 industrial report notes that development activity increased last quarter in both the US and Canada to a total of 155.9 million square feet under construction, up from 142.9 million square feet in Q2. “The absorption-new supply ratio increased slightly to 1.7:1.0, from 1.4:1.0 in Q2, but has come down significantly from more than 2.0:1.0 in 2013,” the report states. “This will be a key metric to gauge the supply-demand balance as development activity increases further” in subsequent quarters.

Where that development occurs may shift slightly, but only slightly, thanks to the uptick in demand for same-day delivery by shoppers buying online. “The strongest demand and development will continue to be in the major markets, which can service the major population centers which can be delivered same day,” Hotchkiss says, adding that "some next-tier cities will see some development as more and more retailers look for sites.”

Not only development activity has been strong: investment sales have exceeded $11 billion in each of the past six quarters, the longest such streak since Q1 2008, says Colliers. The average cap rate decreased to 7.3% in Q3, the lowest since Q2 '08, and cap rates for the top quartile of warehouse properties are noticeably lower, averaging 5.8% during the quarter.

The Blackstone Group's announcement Monday night that it would sell its entire IndCor industrial platform to Singapore's sovereign wealth fund, GIC Pte. Ltd., was among the largest such portfolio deals the sector has seen, but it's not the only recent example. “There has been a flurry of activity, and with cap rates compressed and demand for industrial strong, there will continue to be portfolio sales,” says Hotchkiss. In line with with GIC's pending acquisition of IndCor, Hotchkiss says we'll see “more and more foreign capital looking at portfolios because of the strength of the US economy.”

The report also notes an event, or the threat of one, that has given a boost to markets centered around East Coast and Gulf Coast ports: the possibility of a strike by port workers on the West Coast. This is due to “increasingly contentious labor negotiations” between the International Longshore and Warehouse Union and the Pacific Maritime Association, which negotiates on behalf of port operators. This has led to major retailers and other end users redirecting shipments to ports in right-to-work states, such as Houston on the Gulf Coast and Savannah and Charleston on the East Coast.

Although West Coast workers remain on the job, the specter of disruption is having a lasting effect, Hotchkiss says. “The threat of the strike, along with the Panama Canal being completed in the near future, will have an impact on the development of distribution near the East Coast and Gulf port cities, like Richmond, Savannah and Mobile,” he says. Retailers want to have options so that the flow of their goods is not disrupted.”