Industrial Is a “Darling” of CRE

LOS ANGELES—The 1Q15 report from Lee & Associates reaffirms that the industrial sector is booming and shows no signs of slowing down. Of the three sectors the report reviews—office, retail and industrial—the industrial sector was the standout of the product types with a national net absorption of 49.6 million square feet and vacancy rates falling by 100 basis points nationally, with some markets, including Los Angeles, reporting vacancy rates as low as 3%.

“Net absorption will be slowed not be demand but by available space, development will have a hard time catching up with demand. Industrial is probably the darling of the three product types,” Jeff Rinkov, CEO of Lee & Associates, tells GlobeSt.com. “The vacancy was never quite as high as the other product types, and it is at historic lows both in coastal markets and at major distribution markets in between. It is shocking to see that almost every market that we highlighted being at sub-10% to single-digit vacancy rates, and then there are a number of markets that are between 2% and 5% vacant. The most concerning is the Southern California market, which is 3% vacant with almost zero available land to try and return the market to normal.”

Construction activity is strongest in the major markets where land is still readily available, including Atlanta, Dallas/Fort Worth, Chicago and Southern California's Inland Empire. The high demand and tight supply, however, has put upward pressure on rents with nearly every one of the 13 markets reviewed in the report experiencing either growing or flat rents, with the exception of Dallas, TX, which was the only market with declining rental rates. Nationally, rental rates rose 1.3% to an average of $5.63 per square foot. “The balance of power has shifted from tenant to landlord, and it has shifted to the point where they are now raising rents materially because there are so few options for tenants,” says Rinkov.

While the demand is running strong, one of the challenges in the sector is the availability of land. Supply is becoming tighter, especially in the more infill urban markets where land is vastly unavailable. In the second quarter, 145 million square feet of industrial product will be delivered nationally, with nearly 60 million square feet of that product already pre-leased. “As the year continues, we are going to see, on a national level, deliveries of new class-A industrial product that will be absorbed quickly and at higher rates,” says Rinkov.

The major industrial sales across the country during the quarter include the 1325-1327 Chesapeake Terrace, which Kilroy Realty bought from DivcoWest for $100.4 million, or $384.78 per square foot, and Exeter Property Group's acquisition of a 3.4 million square foot industrial property in Columbus, which was purchased for $112 million. The major leases include Midwest Warehouse & Distribution System's 604,000-square-foot lease in Chicago, Solo Cup Co.'s 522,267-square-foot lease in the Inland Empire and Samsung's 518,472-square-foot lease in the Inland Empire.