CALABASAS, CA-An eventful 2011 proved to be a pivotal year as the economy weathered setbacks and risks of a double-dip recession, according to locally based Marcus & Millichap Real Estate Investment Services, which exclusively shared its industrial research market report with GlobeSt.com. “The US continued to capitalize on the strength of international trade flow, business investment, technology and manufacturing, later aided in large measure by the energy sector and the resurgence in consumer demand,” says Alan Pontius, managing director of the national office and industrial properties group of Marcus & Millichap

According to Pontius, the key themes that featured prominently in 2010 continued into 2011 with expanding international trade volumes, logistics operations, and inventory rebuilding supporting demand for big-box warehouse space in distribution hubs located near key seaports, air cargo locations and railroad transit hubs. More than half of total net absorption occurred in five mega-distribution centers, which included the Inland Empire, Dallas/Ft. Worth, Detroit, Chicago and Atlanta.

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Metro areas with key ports, distribution hubs, ties to energy, and diversified technology companies comprise the top 10 rankings in the index. Houston (No. 1) edged Los Angeles (No. 2) from the top spot, reclaiming all jobs lost in the recession and hitting 2007 peaks in space fundamentals. “Strong port activity and low vacancy maintain Los Angeles’ perennially top ranking,” says Pontius. Its key distribution hub, the Inland Empire (No. 4), surged 11 positions as net absorption totaling 23 million square feet over two years resulted in a 430-basis-point reduction in vacancy. Seattle (No. 3), which held its ranking from last year, is forecast to post the highest effective rent growth; rising port activity drives strong demand for big-box warehouse and high-tech fl ex product, adds Pontius. Strong port operations and a near doubling in tenant demand boosted Miami (No. 5) by three places.

 

The resiliency of key economic drivers finally moved the needle in leasing demand and net absorption of industrial space in 2011. International trade, consumption and inventory rebuilding ignited demand for big-box warehouse space in key port and distribution markets across the country. Similar to other property types, recovery in fundamentals has been bifurcated by market and asset class, favoring coastal metro areas with large ports and their immediate distribution hubs, e.g., Los Angeles and the Inland Empire, and modern, class A functional warehouses, says the report. Demand also recovered earlier in markets with strong ties to energy, technology and logistics operations, such as Houston and Dallas.

The uptrend in fourth-quarter GDP growth and employment coincided with appreciably higher levels of net absorption, with demand nearly doubling between the first and fourth quarters last year. Industrial tenants absorbed 29.1 million square feet in fourth quarter, 2011, the biggest quarterly gain in four years, adds the report.

On balance, lateral movements and renewals also characterized much of leasing activity in 2011 and two years of record-low space deliveries proved key to stabilizing vacancy rates, says the report. “Manufacturing and high-tech businesses have lifted demand for class A multi-tenant properties, but weak credit markets and diminished confidence hurt small to mid-size business expansion, which translated to a distinctively flatter trajectory for occupancy and rent recovery in small-bay warehouse and class B and C multi-tenant properties,” says Pontius. “Total net absorption of all types of industrial space registered almost 97 million square feet in 2011, six times higher than 2010, and resulted in a 70-basis-point decline in the national vacancy rate to 11.9%.”

Effective rents remained unchanged at $4.41 per square foot, stemming a three-year cumulative decline of 17%, according to the report. In perspective, net absorption comprised 0.9% of existing stock, well below the 20-year average from 1980-1999 of 1.4%. Recessions bookended the 2000s decade, skewing historical averages. New supply totaled 28.4 million square feet in 2011, or 0.3 percent of stock, compared with the long-term average range of 1.6% to 1.7%. According to the company’s forecast, rents will gain traction when minimal new supply meets surging demand.

The broadening scope of industrial sectors that drive economic growth, such as trade, transportation, consumption, manufacturing, business investment, and employment, delivers an optimistic message about the trajectory of industrial real estate recovery in operations and value, according to the report. The national picture for space fundamentals improved significantly over the past year, but recovery has been narrowly confined to modern warehouses strategically located in gateway markets and national distribution hubs, which belies the challenges facing properties outside that box. According to the report, non-warehouse product absorbed a disproportionate share of losses in NOI following the recession. “Many owners of industrial properties have continued to work through a deleveraging process, absorbing higher financing and loan modification expenses, further stabilizing their asset bases with highly competitive lease terms, and striking a balance between restructuring and retiring debt facilities and near-term, debt maturities,” explains Pontius. “In addition, the level of new distress still exceeds workouts and, for these reasons, industrial investors generally remained committed to a defensive investment strategy in 2011, largely focused on core acquisitions.” However, the report notes that a selective concentration of portfolio acquisitions in secondary markets consisting of data centers and showroom space located in Phoenix, Atlanta and Las Vegas proved the exception to this trend. In terms of transaction activity, the report points out that it rose by 14% in 2011, while dollar volume rose nearly 7%. “Sales volume remains well below the other major property types, but levels appear to be gaining momentum,” explains Pontius.

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