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The revival of the industrial market has become unmistakable and those in the sector usually express tremendous optimism about the near future.

“We are seeing recovery across all sizes of industrial buildings,” says Chris Zubel, who was recently named managing director of CBRE's Chicago industrial group and helps run the overall Chicago operations. “We are even starting to see speculative construction, and that's something we haven't seen since 2007.” 

The general wave of revival has hit many core markets, including Chicago, Atlanta, the Inland Empire, New Jersey and others, he adds. “Investors are starting to take the vacant land that was in their inventory and put up spec buildings; industrial real estate is in a total recovery mode.”  

For example, in some Chicago submarkets, due to a combination of available land and good transportation options, developers have started the speculative construction of huge big-box distribution facilities that encompass hundreds of thousands of square feet. But even in older, denser submarkets without much available land, developers have started building smaller facilities on spec. “That's still significant because we haven't seen it for so long.”

Experts say several factors have driven this growth. Most notably, the expansion of e-commerce has sparked the need for big-box distribution centers in major distribution hubs. “More than one-third of 2012 build-to-suit requirements were e-commerce related,” Prologis stated in a March 2013 report on the US industrial recovery. According to the US Census Bureau, e-commerce sales totaled $225 billion in 2012, more than double the amount in 2005.

Cushman & Wakefield's final industrial snapshot of 2012 also found that “strong demand for big-box quality space in major logistics markets has triggered an increase”  in both BTS and spec development. Last year, 58 million square feet of supply was added to the nation's inventory and 57.7% of that was built to suit, much of it for e-commerce giants like Amazon.com, but also for more traditional retailers like Home Depot, which increasingly rely on e-commerce. 

Home Depot, for one, has signed a lease to occupy the new CenterPoint Intermodal Center, a 1.6-million-square-foot BTS warehouse and distribution building in Joliet, IL, which developers should finish in Q3.

In total, developers currently have 57 million square feet of industrial space under construction. The Inland Empire leads all markets with 6.8 million, and Dallas comes in second with 5.8 million.

Zubel expects this wave of construction to continue. “We have an undersupply of class A space and developers have seen this.” But most of this new space gets snapped up once the builders have it ready for lease, making room for even more construction. “It's really a question of absorption as we move forward,” he says.

However, in its March 2013 report, Prologis found that “new starts remain well below historical norms, which means new demand can quickly tighten the market. In fact, supported by robust new demand, the vacancy rate declined 30 basis points in the fourth quarter of 2012, the largest quarterly decline since 2006.”

Other researchers may not agree on the exact numbers, but their overall conclusions remain the same. In a look at the industrial market in 2012's last quarter, Jones Lang LaSalle states that the vacancy rate dropped 20 basis points, “the largest drop in almost two years.” Demand grew the most since 2008, with deliveries jumping and construction starts “popping up at a significantly faster rate.” Most impressively, quarterly absorption “rose dramatically” to 57.3 million square feet, “a gain more typical of the pre-recession market.” 

Markets with the highest absorption in square feet were Chicago, with 6.8 million; the Inland Empire, 4.6 million; and Dallas, 3.3 million. Considering its small size, Memphis scored perhaps the most impressive gain, 2.9 million, more than either Houston or Los Angeles. 

And the revival has begun having an impact beyond kick starting new construction. The era of landlords having to entice tenants into leases by making concessions might not have ended yet, but there has been a significant change since the dark days of the recession. “In general,” Zubel says, “corporations throughout the country, and this includes Fortune 500 companies and smaller, more local ones, are definitely more confident about their business and there is a trend toward signing longer leases.”

Tenants still retain some advantages. The recession has left prices depressed in a lot of areas, which means many prospective renters eager to sign long leases want to lock in lower rates. Tim Echemann of the Ohio-based Industrial Property Brokers works in a lot of the smaller markets in Ohio and Indiana. He observes, “Ohio is also seeing resurgence, but you can still pick up great value.” He estimates that tenants and buyers in some regions can pick up property for 20% to 30% cheaper than they could just five years ago.

Prologis says the national data show that rents remain as much as 17% lower than during prior peaks. However, the conditions currently so favorable to tenants' will start to evaporate in the next few years. “Effective rents are forecasted to rise 25% during 2013-2016, as face rates rise 20% or more and recessionary concessions burn off.”

And those lower prices haven't stopped landlords from doing deals. “I'm putting more product out the door than ever,” Echemann says about Findlay, one of the industrial towns in Northeast Ohio where he works. The buoyed automobile industry has sustained many local industrial concerns, and the town of about 42,000 also hosts large employers like Marathon Petroleum and Cooper Tire & Rubber Co. “Buildings have gone up in industrial parks and filled up with world-class companies.” He recently signed Ohio Logistics, a company that provides distribution services, to a lease for 61,512 square feet in a 175,485-square-foot warehouse. “We got this building on the market in December and now we're full.”

Growing confidence means many businesses have stopped deferring leasing decisions. “Net absorption has been positive in each of the past 10 quarters,” according to the Prologis study, “but the fourth quarter of 2012 was the strongest since 2006.” Furthermore, “momentum should continue into the first half of 2013, at a minimum.”

Whereas industrial's recovery from previous recessions was relatively quick, after the official end of this recession in mid-2009, industry kept sagging. “The severity of the downturn for industrial drivers was atypical,” Prologis researchers found, “for two reasons: the withdrawal of credit to finance trade and uncertainty surrounding retail sales as consumers deleveraged.” But Prologis believes consumers and banks have stopped stepping on the brakes and “industrial drivers have been rising since the end of 2010 and are mostly above prior peaks.”

In fact, many of the nation's economic indicators have turned strongly positive. For example, retail sales have been increasing fast enough to outpace companies' growing inventories, now 4% below their long-term trend, Prologis says, leaving potential for even further growth. “We look for at least 3% inventory growth in each of the next two years.” And the Institute for Supply Management's US manufacturing index hit 50.7 in December, indicating expansion. Since then, manufacturing has strengthened even more, with the index hitting 53.1 in January, 54.2 in February and 51.3 in the latest report. Employment in manufacturing increased 25,000 in December alone, according to Cushman & Wakefield, while home sales have also helped drive expansion, increasing 9.2% in 2012. And “residential construction could potentially double in 2013 from its level in 2012, which bodes well for the industrial sector.”

Still, no one seems to forecast a completely smooth path to full recovery.

“There are a lot of businesses, even if they have the funds, that may not want to invest in [new] facilities,” due to lingering economic worries, says Cary Goldman, a principal and partner in the Sitex Group, which owns dozens of industrial properties in the New York-New Jersey and Chicago metropolitan regions. Therefore, for the next few years, many companies, especially smaller ones, will choose older and cheaper facilities, instead of seeking out new construction. “Now that the vacancy rate is coming back down, there's less functional space available out there,” Goldman adds. Sitex expects to spend about $300 million in its markets over the next two years, buying and rehabbing older industrial properties. 

But most experts say political factors make up the chief obstacles to recovery and worry about Washington dysfunction, such as partisan in-fighting. For example, according to Prologis, “momentum continues, [but] political headwinds such as the expiration of the payroll tax holiday and expenditure cuts through sequestration temper the economic outlook and add some uncertainty.” 

Still, no matter what happens in Washington, the increasing strength of the housing market should cancel out anything politicians might sabotage. “For once,” according to JLL researchers, “we can say the upside potential and the downside risks are coming closer to balance for the market, and we remain optimistic about 2013.”