Industrial Sector to Hit Equilibrium Next Year

CHICAGO—Earlier this week at a conference hosted by BMO Capital Markets, James Connor of Duke Realty concluded a panel session by pointing out how well things are going in the industrial sector. Rents are on the upswing, new development has increased and occupancy and absorption remain high. And the good news is not just for developers.

"It's a welcome sign for investors and encourages them to put their money into this very healthy asset class," Erik Foster, an Avison Young principal, tells GlobeSt.com. And although some have raised the possibility that all this robust leasing activity might encourage overbuilding, there has been little sign of that happening.

"The recession took out a number of smaller developers," he says, and this has been just one of the factors keeping the market from becoming too exuberant. The equity requirements for industrial projects have been raised and banks are in general considerably more cautious about lending. Borderline projects that may have gotten a green light in the go-go days of 2007 now don't get off the drawing board. "It requires real equity and expertise to do a development these days." 

And when it comes to speculative development, "the smart money is going to the larger, more sophisticated tried and true markets," such as Chicago and core areas on the coasts. Developers in secondary and tertiary markets are still concentrating on build-to-suits. Specs have begun spreading into metro areas, such as Atlanta, that had rebounded more slowly from the recession. "A year or two ago, there was not much activity in Atlanta," but all that has changed.  

Industrial vacancy there just hit a 13-year low, and, as reported in GlobeSt.com, the area now has a steady stream of organic growth combined with new entrants to the market. And Todd Barton, a CBRE first vice president of industrial, says that "the amount of spec development underway, while significant, is appropriate for the market given the limited deliveries in the past five years.”

Foster says the decline in oil prices has not had much impact on the sector, even in the metro areas historically dependent on the energy sector. "I think there was a bit of a pause in Houston," as developers and investors waited to see how the price decline would impact the local economy. "But because people need things, expansion in the industrial sector is for the most part driven by population growth, and Houston is still growing."

Eventually, however, the amount of new supply will begin to catch up to the robust demand and leasing activity, he says. "We will probably hit equilibrium next year."