In fact, last year, the U.S. industrial real estate market marked its strongest performance since 2005, with 328.5 million square feet in leasing activity and 117.2 million square feet of positive absorption.
- Leasing activity rose 6.2 percent year over year. Greater Los Angeles continued to lead the nation, with 35.8 million square feet in activity, followed by Chicago with 30.9 million square feet. Seventeen of the 37 markets tracked by Cushman & Wakefield reported increased activity in 2013. Fourteen of these markets posted double-digit annual increases. Northern New Jersey posted an impressive 40 percent increase, while the Pennsylvania I-81/I-78 corridor recorded a 30 percent year-over-year increase.
- Additionally, net demand is up 23 percent from last year, with only one out of 37 markets tracked recording negative absorption. Dallas/Fort Worth led the nation with 15.1 million square feet of occupancy gains in 2013, followed by California’s Inland Empire with 12.6 million square feet.
The overall vacancy rate has now declined for 13 consecutive quarters. In the warehouse sector, specifically, vacancy has reached its lowest rate in five years, declining for 15 consecutive quarters. We are also seeing upward pressure on rents. The average direct asking rate rose to $5.92 per square foot in the fourth quarter of 2013, marking a 4.2 percent year-over-year increase. Rents are still 13 percent below their peak level achieved in 2008, but they have been inching up slowly since second quarter 2011. The reason for the slow pick up to date can be partially attributed to the fact that as the recovery continues to favor newer high-quality product, the price gap between Class A and Class B/C space has been widening. We expect the rate of rent increases to gain momentum in 2014, with steady appreciation to follow.
Ultimately, these positive fundamentals have sparked a new wave of development. As 2013 came to a close, 79.4 million square feet of new industrial space was under construction, up 87 percent compared to year-end 2012. New development is particularly strong in the Inland Empire, Chicago, Dallas/Fort Worth, Houston, Central New Jersey, and the Pennsylvania I-81/I-78 distribution corridor. Each of these markets has four million square feet or more under construction. Demand for big-box space is also growing in secondary major distribution and population hubs such as Indianapolis, Memphis, Phoenix, and Houston. Approximately 380 million square feet of new supply is projected to be added to the U.S. industrial base from 2014 to 2017 (about 18 percent less than what was added from 2005 to 2008).
Redefining the Term “Ideal Location”
E-commerce continues to drive demand for these modern logistics facilities. With online sales anticipated to reach $370 billion by 2017, up from $231 billion in 2013, the industrial real estate market will be a main beneficiary. While location has long been the most significant success factor in retail distribution, e-commerce is redefining the meaning of “ideal location” for a fulfillment center. The evolution of e-commerce from a two- to three-day delivery window toward a same-day fulfillment model is driving the new design requirements and the clustering of big-box sites near population centers. The rise of urbanization and further regionalization to support online shopping will increasingly influence real estate decision-makers and markets.
Traditional brick-and-mortar companies also are playing a key role in the industrial development pipeline. To accommodate the evolving landscape, they are setting up dual operations backed by mega-distribution facilities that support both online and in-store inventory. In response to this powerful demand driver, we are seeing a significant amount of new development projects that are catering to e-fulfillment — for both e-commerce-only retailers and multi-channel retailers. Virtually all of the demand in this sector is for build-to-suit or owner-built facilities due to the highly specialized fulfillment and distribution requirements of e-commerce and omnichannel retailing.
The evolution of e-commerce from a two- to three-day delivery window toward a same-day fulfillment model is driving the new design requirements and the clustering of big-box sites near population centers. Amazon is leading the change, rapidly building new state-of-the-art distribution facilities that often are one million square feet or greater. Amazon currently has fulfillment centers in 15 states and plans to expand into more states soon. In order to compete, traditional retailers like Wal-Mart, Target, and others are occupying mega-facilities that support expansion of their e-commerce business. Home Depot’s new 1.6-million-square-foot facility at the CenterPoint Intermodal Center in Chicago and 1.1 million-square-foot facility in Atlanta are prime examples.
As retail foot traffic drops and as retail development, overall, struggles, it does appear that a change is here to stay. Stores are no longer the stockroom but rather the showroom and services touch point, and the backward movements of inventory, i.e., back to the warehouse, continue to bode well for industrial real estate services.
Changes in the Supply Chain
Industrial site selection is also being driven by changes in the supply chain, as ports get ready for the opening of the widened Panama Canal. After the canal expansion is completed in 2015, many of the products traditionally transported to the West Coast may be left on vessels to make the journey all the way to East Coast ports.
With an eye to the increased volume and demand, new distribution hubs are being developed nearby to serve U.S. ports: Cranbury/ Robbinsville in central New Jersey, just south of Port Newark-Elizabeth; York in central Pennsylvania, a short drive north from the Port of Baltimore; and Pooler, Georgia, near the Port of Savannah. The Panama Canal expansion could also be a game changer for South Florida industrial real estate since the Port of Miami will be able to handle the post-Panamax ships — a huge advantage that will drive demand for modern, institutional-quality buildings able to handle the newest containers and trucks.
Cities that are especially well positioned to attract new distribution projects are those that link to the global economy through ports and airports. The major inland ports of Chicago, Dallas/Fort Worth, Southern California’s Inland Empire, and Atlanta have benefited the most from increased international container volume. This has allowed them to experience the largest increase in demand for industrial space. Collectively, more than 107 million square feet of new supply are expected to be delivered in these four markets in the next four years.
As transportation costs rise, more shippers are looking to locate their distribution centers closer to their end markets and to reduce long-haul trucking costs by using intermodal rail. With escalating fuel and trucking costs, we also are seeing an increased emphasis on railways and leveraging intermodal distribution centers. As transportation costs rise, more shippers are looking to locate their distribution centers closer to their end markets and to reduce long-haul trucking costs by using intermodal rail. Although the major hubs are leading the way in absorption and construction, activity is trickling down to smaller markets, including Kansas City, Missouri. Kansas City is second only to Chicago nationally in terms of the number of freight trains passing through and tops the nation when it comes to freight tonnage traffic.
From an economic standpoint, we anticipate continued progress in 2014. After more than four years of steady but sub-standard growth with real GDP, the U.S. economy is poised to accelerate this year and next. The uncertainty caused by the fiscal debate in Washington, D.C., is fading, and the impact of the tax increases and spending cuts enacted in 2013 are diminishing.
As confidence improves, a number of private-sector developments will drive industrial growth, including:
- The continuing revival of the housing sector —which will boost construction as well as sectors such as furniture, appliances, utilities, and financial services
- Activation of pent-up demand by consumers — as durable goods wear out, households will be more willing to spend to replace them
- Rising demand for exports, as Europe and Asia grow more rapidly
- A shift in business attitudes and the greater willingness to take risk — which is expected to lead to stronger employment growth and increased investments in people and equipment