'The Second Industrial Revolution'

(Second of two parts)

CHICAGO—It's accurate but incomplete to note the uptick in demand for industrial real estate due to the increasing prevalence of e-commerce. To Cushman & Wakefield's John Morris, it's no less than “the second Industrial Revolution.”

At no other time since more than a century ago “have there been such fundamental and significant shifts in how our economy functions, changes in how people shop, live work and play, changes in the types of properties being developed and what properties are being leveraged for,” says Morris, industrial services lead for the Americas at C&W. Driven by the information economy, the latter-day industrial revolution will continue to make “an impact on the industrial market that will power through any softening in GDP and overall economic growth,” Morris says in a new C&W podcast.

Along with leasing that reached its highest volume since 2005 at 340 million square feet, the past year brought another positive indicator for industrial, and that was the level of construction compared to space absorption. “In all but a very few markets, the absorption continues to surpass the construction or the new supply,” says Morris. “It's a healthy imbalance, and by healthy I mean there's enough of a spread between demand and recovering supply or replenishment.”

That ratio extends to the level of construction in the top 10 markets. When it reached 85% of the total for the US, “we were worried that the market was almost too hot and there was not really enough development in the secondary markets,” Morris recalls. Conversely, if it were to fall to 65% of the nationwide total, “that typically means that capital is looking for new places to find return, that there's yield fatigue.” At the moment, though, it's in the range of 72% to 75%, “and we think that's another strong indicator for the industrial real estate market.”

On the office side, C&W's Maria Sicola sees a comparable gap between supply and demand. In 2014, “New construction totaled 21.75 million square feet, and that is really on par with what we saw in 2013,” says Sicola, Americas research head.

For this year, the development pipeline is “robust,” says Sicola. “We expect about 36 million square feet to come on line,” although she adds that this figure still represents “ only 1% of total inventory.”

Looking at the pipeline of new supply and coupling that with an expectation of stronger employment growth in 2015, C&W is predicting “market tightness and further upward pressure on rents,” says Sicola. “For the US as a whole, we anticipate a 150- to 200-basis point drop in vacancy rates by  year end, and 4% to 6% growth in asking rents.”

The past year saw the vacancy rate in CBDs nationwide decline by 150 bps, says Sicola. “Positive absorption in several of our downtown markets actually hit record levels, and the total for the nation as a whole, at 23 million square feet, was actually the highest we've seen since the year 2000.” Twenty-five percent of the office markets covered by C&W now have single-digit vacancies.