3 Reasons Industrial Vacancy Rates Continue to Fall
Despite a bumpy ride in the financial markets during the first quarter, the industrial sector has remained firmly on track.
The U.S. industrial market logged its 24th consecutive quarter of expansion with 59.6 million sf of positive net absorption, according to a new first quarter report by CBRE. That demand for space helped drop the vacancy rate 20 basis points to a 15-year low of 9.2%.
Yet improvement was more muted due to some formidable challenges, notably the strong dollar and reduced trade with China. Lower oil prices have also hurt manufacturing related to oil and gas production. Overall, the U.S. economy saw its annual GDP growth rate slow to 0.5% during the first three months of the year, which was down significantly compared to the 1.4% reported in fourth quarter.
Still, there have been some bright spots that have lifted the sector, including positive – albeit weak – consumer spending and an increase in retail sales both in stores and online.
The expansion of e-commerce and a growing network of fulfillment centers for online sales is driving demand for warehouse and distribution space. In fact, retailers signed four of the five largest deals in first quarter.
Amazon agreed to lease 1.1 million sf in San Bernardino and 822,000 sf in Kansas City. Meanwhile, Williams-Sonoma leased 1.1 million sf near Atlanta, and Bed Bath Beyond committed to 799,000 sf near Dallas, according to a report by Newmark Grubb Knight Frank. The demand for space has produced steady rent growth with asking rates rising 1.5% in first quarter and up 4.4% over the past year.
The improving fundamentals also continue to create a compelling story for both investors and developers. Industrial properties are a hot ticket for buyers. Last year was a big year for portfolio sales and that activity has continued in 2016. For example, Biynah Industrial and Olympus Ventures announced the joint venture acquisition of an eight-building, Class-A industrial portfolio in Indianapolis for $167 million in February.
Although completions dropped in first quarter, there continues to be an active pipeline of new development projects. There was an estimated 16.9 million sf of warehouse/distribution space completed in first quarter compared to the 19.3 million sf completed in fourth quarter, according to Reis. The most active markets for new construction were Atlanta with 3.9 million sf completed, Dallas at 2.4 million sf and Chicago at 2.3 million sf. The limited new supply on the Flex/R&D side continues to help vacancies improve in that sector. There was roughly 594,000 sf of new space completed compared to 1.16 million sf of net absorption, according to Reis.
Overall, the U.S. economy is still expanding at a moderate pace, which bodes well for further improvement in the industrial sector. Retail will continue to have a big influence on the demand for industrial space. Although development could be a wild card in some markets, most analysts are predicting that demand and rent growth will stay on a steady course through 2016.