CHICAGO—Speculative industrial projects have sprouted up across the US in the past few years as an economic recovery has slowly taken hold. In order to satisfy the growing demand for new distribution space, developers in the top 30 US markets have 94.6-million-square-feet of speculative construction underway, according to a new study by Avison Young. However, this new supply will take around 12 to 18 months to hit the market, keeping the nation's supply of industrial assets constricted, pushing up prices for these in-demand products.
And by analyzing CoStar Group industrial statistics, the Toronto- and Chicago-based firm found that investment sales in the past three years matches the velocity in the three years prior to the onset of the recession. “During each of these periods there was approximately 1.4-billion-square-feet of sales recorded,” the firm found. “This translates to almost 11% of the total industrial inventory changing hands.”
However, neither the prices for these assets nor the pace of new construction measure up to the pre-recession period. Investors paid an average of $66-per-square-foot on the 1.39-billion-square-feet sold from 2005 to 2007, but only an average of $59-per-square-foot on the 1.43-billion-square-feet in the last three years.
And although development has returned after several lean years, in the past three years only slightly more than 200-million-square-feet was delivered, about 1.5% of the total market. By comparison, over the three pre-recession years new construction deliveries totaled 583.3-million-square-feet, or about 4.4% of the then-existing market.
“The construction of industrial buildings, especially spec, has been tempered by everyone's clear memory of the recession,” Erik Foster of Avison Young's national industrial capital markets group, tells GlobeSt.com. “The demand from the tenant side is moderate, and in most markets of the US we are not overbuilding.”
Avison Young puts all these factors together and concludes that new construction is “not keeping pace with investor demand in some markets.” And the relatively low prices, which the firm expects to increase at least through 2015, justify “continued investment activity in the sector.”
Investors should continue to purchase industrial property, Foster adds, especially well-located top-of-the-line product with 32' or 36' clear heights and other modern features like large truck bays, an efficient layout for docking and loading, and large parking and truck staging areas. However, with all the competition among investors, even some class B product will generate interest, along with buildings in secondary markets.
Foster and the national industrial capital markets team estimates that investment pricing will increase in most markets at about a 3% pace during the next year. “Based on current conditions, it will take the national market at least two to three years to achieve a consistent return to pre-recession pricing levels.” Still, some markets, such as the gateway markets or those that are land-constrained, such as New Jersey, Los Angeles, Miami, and Seattle, could see prices increase by 7 to 10% and make up the difference considerably sooner.
“We're still not there yet,” says Foster, “which makes us feel bullish about where we are in the cycle.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
