Industrial Construction Still Below Peak Levels

Marcus & Millichap is based in Los Angeles.

LOS ANGELES—The industrial sector is booming, and some have even called it the new darling of commercial real estate, dethroning multifamily. Yet, the sector still hasn’t caught up to prior peak construction levels, according to executives at Marcus & Millichap on the recent office and industrial webcast. Construction is still only at two-thirds of the previous peak, which is keeping vacancies low and fueling rent growth. “The industrial market has been doing very well,” John Chang , FVP of research at Marcus & Millichap, said on the webcast. “Vacancies have tightened up dramatically, and a major factor has been completions. They are actually anticipated to tick down in 2016 to 1.2% of inventory levels, down from 1.3% in 2015. But, we are still at about two-thirds of the construction levels that we were at the prior peak levels, so we haven’t seen construction ramp up to where we were before the recession. It is really being contained, and that is supporting the continued downturn in the vacancy rates, which is supporting our rent growth in this sector as well.” Property values, however, are above the prior peak by 5% to 10%, depending on the market, with port-proximate markets the healthiest. Chang also notes that cap rates aren’t compressed “too low.” He adds that that fundamentals are driving this appreciation and the values are based on actual revenues rather than projected growth. Ecommerce is driving much of the industrial-sector growth, accounting for 11.3% of total retail sales. “Ecommerce has structurally changed the use of industrial space, and now it is about the continence and delivery times,” says Chang. “They are placing a lot of shipping service facilities next to major urban areas. They are trying to get next day delivery and same day delivery into urban markets, and that takes a lot of this industrial space. It is not just Amazon; you see this happening a lot with traditional brick-and-mortar retailers because they are trying to get close to their customers.” International trade is the second major driver, specifically for exports rather than imports, which have seen a decline because of a lack of global demand for American-made goods. “When you look and the other major factors, it is international trade, and particularly exports,” adds Chang. “Manufacturing sector has slowed down because of the decreasing demand for US goods, but on the other side, imports coming into the US because of container demand continues to rise.” This industry is also driving a need for more industrial space. “With all of these factors, it is very hard to come up with a negative outlook for industrial,” says Alan L. Pontius , SVP at Marcus & Millichap, said on the panel. “We remain extremely bullish on the industrial market. I don’t think we are fully priced because the expectation that we still have operating gains ahead of us remains in place. We are really in a healthy outlook.”