Industrial Sector Continues Its Slow and Steady Improvement

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On the road to recovery, the industrial sector has been more of a tortoise than a hare. Fueled by the growing e-commerce market and the recovering housing sector, the industrial segment appears set to continue its slow and steady improvement in the months ahead.

That was the consensus of a panel of experts on a recent episode of the “Commercial Real Estate Show” radio program. My guests and I discussed a variety of topics, including vacancy rates, rent growth and the limited return of speculative construction.

Ryan Severino

Becoming A Landlord’s Market

The national vacancy rate for the warehouse/distribution market fell by 10 basis points from first to second quarter, to 11.8 percent, said Ryan Severino, senior economist at Reis. Additionally, the average asking rent grew 0.5 percent to $4.74 per square foot, while the average effective rent also rose by 0.5 percent to $4.30 per square foot.

For flex/R&D properties, the national vacancy rate also declined 10 basis points to 13.8 percent, according to Severino. The average asking rent increased 0.1 percent to $8.82 per square foot, and the average effective rent grew 0.1 percent to $7.84 per square foot.

Brian Cardoza

The properties that are considered the most desirable by tenants are the most modern ones that include greater clear heights, T5 lighting, deeper truck courts and trailer parking, said Brian Cardoza, senior leasing manager at Prologis.

Larry Callahan

The improving fundamentals are gradually making the industrial sector less of a tenant’s market, guests noted. “As more space gets absorbed, particularly the space that people find appealing that’s the right location and size, it does shift the dynamics of the lease negotiation a little bit more toward the landlord,” said Larry Callahan, CEO of Pattillo Industrial Real Estate.

Continued Rise of E-Commerce

Online retailers are driving much of the new demand, according to the show guests. “E-commerce users are having a significant impact on the industrial market,” Severino said. “They are clearly preferring new centers with large contiguous blocks of space with more dock doors, preferably cross-decked, with greater clear heights and floors that can support heavier loads.”

A reviving housing market could also help drive down industrial vacancy rates in the future as suppliers need more warehouse space for their materials, Callahan added. “All of the people that serve housing like carpeting, flooring, cabinetry and air conditioning are all going to pop up with it as building comes back,” he said.

Looking ahead, expect more slow improvement in the sector, Severino said. “We are still waiting to see an acceleration in the underlying economic growth before we see more of an acceleration in the industrial market fundamentals,” he said. “I would expect the rate of improvement to be about the same as we’ve seen over the last six to 12 months.”

Speculating on Development

Guests also noted that both build-to-suit and speculative construction are taking place, although the latter is happening to a decidedly limited extent. “Certainly we are doing build-to-suits,” Cardoza said. ”For spec, we are being strategic. There are certain markets where we are either under construction or considering going under construction.”

Pattillo recently constructed two speculative manufacturing buildings, the first built in Georgia in the last four years, Callahan said. The company also acquired some land in Spartanburg, S.C., to construct another speculative building.

“There are places where we are seeing the dynamics reach a point where it makes sense to [build speculative developments],” Callahan added. “We don’t expect a flood of it but people are tip-toeing back into the market.”

The entire industrial market episode is available for download at www.CREshow.com.

Michael Bull, CCIM is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta. Michael on Twitter and LinkedIn.

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