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JLL data paints a bright picture for present, and future, condition of industrial real estate

Chicago-based JLL said that from the fourth quarter of 2016 to the first quarter of 2017 U.S. asking rents headed up 70 basis points to $5.25 per square foot on a triple net basis, with rent growth rising for the sixth consecutive year.

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Based on data and key takeaways in the 2017 Industrial Outlook issued this week by commercial real estate firm JLL, it appears that now is a really good time to be in the industrial real estate market.

Chicago-based JLL said that from the fourth quarter of 2016 to the first quarter of 2017 U.S. asking rents headed up 70 basis points to $5.25 per square foot on a triple net basis, with rent growth rising for the sixth consecutive year. Rents in the East and West Coastal markets in Northern New Jersey, San Francisco Mid-Peninsula, Seattle, and the Inland Empire saw the largest increases, with annualized growth rates over 10%, with vacancy rates in each market under 4 percent.  Based on JLL historical data, 2016 rent was up 7% annually over 2015, with 2015 up 4-5% over 2014.  And for the last three quarters through the first quarter of 2017 rents have exceeded 8% annual growth.

As for vacancy rates, the report pointed out that vacancies are at a 17-year low, falling 30 basis points to 5.3%, even though new construction development

in most markets was seen as steady by the firm. The lowest vacancy markets remained in the California locales of Los Angeles, East Bay, and Orange County, each with vacancy rates below 2%. JLL said that 88% of the 51 markets it tracks expect 2017 “to continue to be favorable to landlords,” adding that significant leasing over the last two quarters has led to stable vacancy rates in multiple markets. JLL also observed that with most of the existing spaces leased out and new deliveries hitting the market at steady prelease rates, there is little to no vacant existing product available in the market.

Looking at construction, JLL said that construction of build-to-suit properties rose 29% sequentially, which it noted is causing a shift in the industrial inventory landscape. And it explained that looking on new deliveries over the last five years, coupled with the current pipeline under construction, the U.S. industrial market will add almost 1 billion of square feet by 2018, which marks 8.1% of total inventory. What’s more, JLL said that 68% of big box leasing were signed at new construction buildings that were built over the last three years, with total new absorption still outpacing new deliveries and up 11.9% annually.  

JLL Vice President, Americas Industrial Research Mehtab Randhawa said in an interview that with rates rising, vacancies declining, and construction up, JLL’s customers are looking for ways to find available space, which is challenging given current market conditions.

“The next option is construction, and there is not much in the spec building or build-to-suit,” she said. “Class D and E space is limited, too.”

In terms of what types of tenants are responsible for the bulk of leasing activity, JLL said that it is clearly logistics and distribution and 3PL tenants, as they comprise 24% of total leasing activity. And as existing logistics companies expand their market presence, JLL said that the food and beverage sector reported the highest number of “new to market” lease transactions.

“There is a pretty close connection with e-commerce,” she said. “Many e-commerce players are out there in the market looking for space. They are also looking to be in close proximity to companies like FedEx and UPS and other companies like that. Others are retailers or e-commerce players looking for new space or are expanding or entering new markets. It speaks to a boom of sorts in logistics, with e-commerce also driving growth in construction and new tenants, too, with most of them being big box users looking for space at 500,000 square-feet and above. That is contributing to a lot of our pre-leasing and leasing activity.”

The perfect storm of rising rents, lower vacancies, and increased construction speaks to the increasing complexity of supply chains, according to Aaron Ahlburn, JLL Managing Director, Industrial & Logistics.

“There is a lot more pressure on companies to deliver on the e-commerce side,” he said. “Having multiple sites closer to consumers is putting pressure on companies to have real estate needs in a lot of different markets, ranging from major markets to secondary markets to tertiary markets. It is really the projecting of their own supply chain, and there is a real estate angle to that.”

As for how much room the market has to run in the current cycle, Ahlburn said that solid real estate market fundamentals are expected to remain intact through the rest of 2017 and into 2018.

“That is really based upon what we are seeing in the leasing and investment markets, and we are projecting pretty strong demand at least over the next 12-18 months,” he said. “It may not be at 2016 levels, but we are still seeing the potential for growth throughout the course of this year and into next year. That speaks to a pretty solid consumer economy, with confidence levels being pretty resilient and expected low and steady GDP growth over the next few years.”


About the Author

Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

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