JLL Report on Industrial Real Estate Has Implications for Supply Chains

The industrial real estate market remains in a strong position for various reasons, according to the Second Quarter Industrial Outlook report from commercial real estate firm JLL.

The report highlighted various factors supporting the thesis for a very strong market, including:

the total U.S. under construction pipeline expanded by 7.3 percent in the second quarter to nearly 200 million square feet at 193,650,119 compared to 180,475,413 in the first quarter; vacancy fell by 20 basis points to 6.0 percent, with JLL noting that despite an increase in new speculative completions, higher pre-leasing rates have helped keep vacancy stable (JLL said this is the lowest vacancy rate in 16 years); total net absorption increased 18.9 percent from the first quarter to the second quarter, posting 62.0 million square feet compared to 52.3 million square feet; occupancy gains kept pace as new deliveries come online, with Atlanta and Dallas combined contributed to nearly 20.0 percent of U.S. occupancy gains; and total U.S. square feet, vacancy, and availability for warehouse and distribution at 8,622,787,834 square feet, 6.2 percent, and 9.0 percent, respectively and total U.S. square feet, vacancy, and availability for manufacturing at 3,527,242,938 square feet, 5.5 percent, and 7.4 percent, respectively.

JLL said that industrial real estate market conditions are increasingly becoming more landlord favorable, with vacancy at a 16-year low, coupled with market fundamentals confirming that demand has not slowed, as industrial and warehousing leasing activity continued to expand. And it also noted that even with more projects breaking ground this new supply is offering some of the new leasing opportunities to tenants in the latter half of 2016.

“The bottom line is that the industrial market is hot,” said Rich Thompson, Managing Director of JLL's Ports Airports and Global Infrastructure (PAGI) group, in an interview.

“And a lot of people are asking questions about when the next down cycle or Brexit or other potential global issue will be, but the industrial market is really strong and has been all year and the vacancy rates are very low and the bigger developers and owners are getting increases in their lease rentals…it has just been really strong. It is good for the economy and is a good economic indicator. The only downside is that if you are a big corporate occupier you will need to expect to pay more when you renew your lease whenever that time comes.”

The JLL executive cited two main reasons for the strength of the market. The first one he cited is the growth of e-commerce, which, he said, “is clearly drawing a lot of interest,” and the other is foreign investment and big pension funds and other investment vehicles looking to invest capital. These investment vehicles are not doing that as much on the retail side anymore, as retail investments, like shopping malls, are not attractive right now, he said.

“The industrial market, especially with the ongoing growth of e-commerce, is going to drive more industrial demand and make things even more interesting,” he said.

U.S. markets that have the highest amount of square feet under construction, according to the report, include: Dallas/Fort Worth at 22,966,298; Inland Empire at 20,782,769; Chicago at 18,301,416; Atlanta at 15,823,308; Philadelphia/Central PA at 13,041,896; and Houston at 11,322,848.

Leasing activity for the big-box size segment (over 500,000 square-feet) was paced by e-commerce and traditional retailers, said JLL, with the two sectors representing nearly 50 percent of total big box leasing for the quarter, and expansionary activity accounting for 28 percent of total big boxes leases in showing expansionary trends for the second quarter.

JLL noted that this leasing activity was paced by 3PL and logistics and distribution companies, with the average space over all leased by e-commerce users in U.S. industrial markets at 491,000 square feet, with 3PLs next at 204,000 square feet. The company added that robust demand by retailers, e-commerce and transportation companies for warehouse and distribution space will drive leasing momentum through the end of 2016.

Looking ahead, JLL said it will be interesting to see if development will continue at its current pace, explaining that through the remainder of 2016 if tenant demand remains fairly stable across most markets, landlords will continue to enjoy a steady pipeline of leasing activity.

“While rents are not generally expected to decline anytime soon, falling vacancy and increase in new supply will continue to push rents upward as we move into the second half of 2016,” JLL said.

SC
MR