CHICAGO—The US industrial sector looks set to have another record-setting year, according to commercial real estate services firm Cushman & Wakefield. The company released its third quarter research findings yesterday, reporting significant absorption and low vacancies, both of which are placing upward pressure on rents in most major industrial hubs. Furthermore, the rise of e-commerce may put off a downward turn in the cycle for an extended period.
“This has been a fairly healthy and long cycle,” John Morris, logistics and industrial services lead, Americas, Cushman & Wakefield, tells GlobeSt.com. But even though the good times have now stretched out for several years, “there is still a lot of net new development, much of it driven by e-commerce.”
Perhaps just as important, developers have launched new construction projects at “a pace that won't result in oversupply. Builders have a measured approach to replenishment that is different from the last cycle. We have overall a balanced market. And as long as that balance remains the fundamentals will stay healthy.”
“Net absorption of 57.9 million square feet during the third quarter reflects this strong performance, bringing the year-to-date occupancy gain in industrial properties to 173.1 million square feet,” he adds.
The firm found that 25 markets, including the East Bay in Northern California, Greater Los Angeles, Houston and Philadelphia had vacancy rates of less than 6%, low enough that researchers consider these markets fully utilized.
In addition, the weighted average US rental rate reached $5.34 triple net in the third quarter, a year-over-year increase of 4.8%. The report notes that about 70% of all markets are experiencing positive rental growth, and 45% have seen year-over-year growth above 5%, with double-digit gains in 14 markets.
How long these upward trends will last is difficult to predict these days. As more companies adopt e-commerce strategies, they will need to build new, modern facilities to handle distribution, a demand that played a much less significant role during the last upswing.
“In previous cycles, we had a couple of factors indicating that a cycle could be coming to an end,” Morris says. For example, the percentage of new construction that was not in core markets would begin to rise. Developers have started to launch a significant amount of new construction outside the core regions, at least in the last three or four quarters. However, “the core markets have continued to be strong,” particularly the distribution center hubs.
At the end of the third quarter, construction activity totaled 182.3 million square feet across the US. Atlanta, Chicago, Dallas/Fort Worth, Inland Empire, Houston and Pennsylvania's I-81/I-78 Distribution Corridor all have more than 10 million square feet in the development pipeline.
The other factor that usually signals a coming downturn is an over-reliance on speculative construction. In the run-up to the last recession, Morris points out, spec developments outnumbered build-to-suits by four to one. “But we're getting nowhere near that at this point.” So far this year, about 39% of completed projects have been build-to-suits.
It has become commonplace to speak of the economy as a ballgame, and ask what inning it's in to peg how long the present cycle will last. At recent conferences on the industrial sector, many participants said it was in the sixth, seventh or eighth. But to Morris “it feels like a ballgame that is going into extra innings.”
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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.
