CHICAGO—US customers' online shopping habits may be cutting into the business of brick-and-mortar retail, but they are helping to propel the industrial real estate market to new heights. Developers will complete a historic amount of new space this year, much of it for product distributors and logistics firms, according to JLL's Industrial Outlook 2017. And as fast as these buildings have risen, tenants have filled the space, pushing vacancy rates to a 17-year low and rents through the roof.
In fact, Chicago-based JLL found that demand is outweighing supply and new construction is struggling to keep up. Adding the new deliveries from the past five years with the current construction pipeline, the US industrial market will add nearly one billion square feet to its inventory by 2018. Dallas, Inland Empire, Philadelphia, Denver and Atlanta were the top six markets, accounting for more than half of the new development starts in this year's first quarter.
“In my 30-plus years in the industry, this is the best we've seen,” Craig Meyer, president of JLL's industrial group, Americas, tells GlobeSt.com. “And it continues to have legs. Years from now, we will look back on this time as the good old days.”
JLL estimates that builders will deliver about 247 million square feet of new industrial space in 2017, a 10-year high. Furthermore, the US market has experienced positive absorption for seven or eight consecutive years, and record-high rents continue to soar, especially in coastal markets such as Northern New Jersey, San Francisco Mid-Peninsula, Seattle and the Inland Empire. The steep prices have done little to curb demand; all four markets saw vacancy rates drop below 4%, and Los Angeles, Orange County and East Bay sank below 2%.
The Philadelphia metro area alone had 8.3 million square feet of absorption in the first quarter, followed by Dallas with 6.5 million square feet and Atlanta with 5.7 million. Chicago came in fourth with 3.4 million square feet absorbed. The national total was 58.5 million square feet, an 11.9% year-over-year increase.
This robust level of demand seems likely to last, as customers' demand to get packages delivered quickly leads more companies to reconstruct their supply chains or hire 3PLs. The national vacancy rate now stands at just 5.3%. And despite the steady flow of new construction, JLL researchers expect that 88% of the markets they track will remain favorable to landlords.
Meyer's confidence in the market stems not just from the level of demand, but how developers have responded. “We haven't had the runaway construction of past cycles. Nearly 50% of everything built is pre-committed.”
He attributes much of this discipline to the heavier involvement of institutional capital in industrial development. The financial wherewithal that these groups have provided since the end of the recession has been necessary. In past cycles, developers were putting up buildings of less than 400,000 square feet, whereas today buildings of more than one million square feet are not uncommon, and can cost $100 million. That kind of money always means more scrutiny.
The good times should continue, Meyer adds. “We don't see any big red flags out there.” One possible cloud on the horizon, however, is the uncertainty that hovers over Washington. “We have a chaotic political environment, but the underlying fundamentals are strong.”
CHICAGO—US customers' online shopping habits may be cutting into the business of brick-and-mortar retail, but they are helping to propel the industrial real estate market to new heights. Developers will complete a historic amount of new space this year, much of it for product distributors and logistics firms, according to JLL's Industrial Outlook 2017. And as fast as these buildings have risen, tenants have filled the space, pushing vacancy rates to a 17-year low and rents through the roof.
In fact, Chicago-based JLL found that demand is outweighing supply and new construction is struggling to keep up. Adding the new deliveries from the past five years with the current construction pipeline, the US industrial market will add nearly one billion square feet to its inventory by 2018. Dallas, Inland Empire, Philadelphia, Denver and Atlanta were the top six markets, accounting for more than half of the new development starts in this year's first quarter.
“In my 30-plus years in the industry, this is the best we've seen,” Craig Meyer, president of JLL's industrial group, Americas, tells GlobeSt.com. “And it continues to have legs. Years from now, we will look back on this time as the good old days.”
JLL estimates that builders will deliver about 247 million square feet of new industrial space in 2017, a 10-year high. Furthermore, the US market has experienced positive absorption for seven or eight consecutive years, and record-high rents continue to soar, especially in coastal markets such as Northern New Jersey, San Francisco Mid-Peninsula, Seattle and the Inland Empire. The steep prices have done little to curb demand; all four markets saw vacancy rates drop below 4%, and Los Angeles, Orange County and East Bay sank below 2%.
The Philadelphia metro area alone had 8.3 million square feet of absorption in the first quarter, followed by Dallas with 6.5 million square feet and Atlanta with 5.7 million. Chicago came in fourth with 3.4 million square feet absorbed. The national total was 58.5 million square feet, an 11.9% year-over-year increase.
This robust level of demand seems likely to last, as customers' demand to get packages delivered quickly leads more companies to reconstruct their supply chains or hire 3PLs. The national vacancy rate now stands at just 5.3%. And despite the steady flow of new construction, JLL researchers expect that 88% of the markets they track will remain favorable to landlords.
Meyer's confidence in the market stems not just from the level of demand, but how developers have responded. “We haven't had the runaway construction of past cycles. Nearly 50% of everything built is pre-committed.”
He attributes much of this discipline to the heavier involvement of institutional capital in industrial development. The financial wherewithal that these groups have provided since the end of the recession has been necessary. In past cycles, developers were putting up buildings of less than 400,000 square feet, whereas today buildings of more than one million square feet are not uncommon, and can cost $100 million. That kind of money always means more scrutiny.
The good times should continue, Meyer adds. “We don't see any big red flags out there.” One possible cloud on the horizon, however, is the uncertainty that hovers over Washington. “We have a chaotic political environment, but the underlying fundamentals are strong.”
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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.
