CHICAGO—Last year the US industrial market hit its lowest vacancy rate in a decade, and since then the continuing economic recovery, the continued growth of e-commerce, a steady housing market and resurgence in domestic manufacturing sent the rate even lower, according to the real estate firm Cushman & Wakefield. The company's first quarter results showed that the robust demand pushed overall vacancy rate down to 6.7%.

“Market fundamentals continue to be strong, driven by a resilient economy, good job creation and a relatively strong housing market,” says John Morris, the Rosemont, IL-based leader of the real estate firm's industrial services group. “But the biggest requirement stems from the need for facilities to satisfy the continued growth in e-commerce activity.”

At 2.3%, the San Francisco metro area boasts the lowest vacancy rate in the nation. In the third quarter its rate had been 3.5%. The Greater Los Angeles region came in second at 3.3%, a decline of roughly 50 bps since the third quarter, and led the nation in leasing with tenants taking 10.8 million square feet of space.

And as vacancy rates plunged, landlords had a stronger hand in lease negotiations. Rents for warehouse space have risen 11% since 2011, the company's data show. “We expect rents to rise another 5% by year-end 2015,” Morris adds, “and to increase more than 10% over the next three years.

Tenants in major industrial hubs across the nation are paying more for space. Average direct rents in the US went up 3.6% since last year. And seven out of the 38 markets analyzed by Cushman & Wakefield for this report posted double-digit gains. The Northern California markets of Silicon Valley and Oakland led the nation in annual rent growth at 18.3% and 14.1%, respectively.

Morris feels that the historically low vacancy rate could go even lower. “Strong market demand for high-quality space has led to tight supply,” but “even with the influx of new construction, increased demand should further reduce our sector's vacancy rates in the near term.”

In the past two years, the growing demand from users and escalating rents has convinced developers and investors to break ground on speculative projects. When the US was digging its way out of the recession, developers remained cautious and concentrated on build-to-suits. But last year more than half of the nation's new industrial developments were done on a speculative basis. Furthermore, that has increased to 71% of the space currently under construction.

“The market ended last year with 105 million square feet under construction and about 340 million square feet leased,” says Morris. “This indicates a marked difference in which demand continues to surpass supply in almost every region.”

“The industrial real estate market has powered through some turbulent times,” Morris concludes. “What we expect from this year is that even in perhaps a more variable economic market overall, industrial real estate and its market will continue to perform strong.”