Industrial Vacancy Wans in Second Quarter

The industrial vacancy rate slipped in the second quarter—albeit nominally. Vacancy increased by 20 basis points in the second quarter, according to a new report from CBRE, but the firm’s Bill Dolan says that it isn’t a sign of waning demand. Year-over-year, which could be a better determinant of demand, vacancy in the market fell 60 basis points. He attributes the slip in growth to large move-outs and one new construction delivery.

“One quarter is not a trend. Quarter-to-quarter things can fluctuate fairly dramatically if, for example, there are a few big move outs,” Dolan, an SVP at CBRE, tells GlobeSt.com. “Year-over-year, vacancy is down, and that is a better indicator. The quarter drop was due to a few large move outs that need time to absorb and a 138,000-square-foot new construction project that was delivered vacant. It is hard to make one quarter a trend line, so we will see as the rest of the year unfolds—but we still feel bullish about the market.”

Lease rates also fell during the second quarter. Lease rates for high finish product fell 4.2% to $1.36 triple net, while low finish product rates fell 1% and $0.90. Rather than slowing demand, Dolan says that the lack of quality product is the cause of decline in lease rates. “When you look at the vacancy in the market, it is comprised of older, lower quality buildings that command lower lease rates,” he says. “Those deals bring down the average. When you peel back the onion, there is more to the story than the feeling that things have taken a turn for the worse.”

Despite the decrease in rental rates for the quarter, Dolan is expecting lease rates to close the calendar year up s much as 5%. “To date year-over-year, we are up just under 5%,” he explains. “All told, by the end of 2018, I would expect similar rent growth, somewhere between 3% and 5% for the calendar year of 2018.”

Despite the fall in vacancy, net absorption was positive, with 67,478 square feet of activity during the quarter and a year-over-year increase of 3.5% in leasing activity. With limited availability and continued demand, new construction is now hitting record highs for the cycle. San Diego currently has more than 3.5 million square feet of industrial product under construction to fuel the demand for quality product. “We are really seeing a flight to function where companies are demanding newer buildings with modern features,” says Dolan. “A lot of the supply that is in the market is older more functionally challenging product. That low vacancy rate is definitely suppressing lease-up and there is pent-up demand. We have 2.4 million square feet of product delivered by yearend, and that will definitely help the current demand.”