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Ending 2013 On High Note, U.S. Warehouse Market Poised for Even Bigger 2014

Early Demand From E-Commerce Indicates Even Stronger Performance In the Industrial Sector Over Next 12 Months
February 4, 2014
Demand for U.S. warehouse space exceeded expectations in the fourth quarter of 2013, with absorption for the quarter reaching among the highest levels on record, and warehouse vacancy rates in the largest U.S. market fell to levels not seen since the early 2000s.

CoStar recorded net absorption of 58 million square feet of warehouse/distribution space within the 210 largest U.S. markets. Meanwhile, the 45 million square feet absorbed in the top 54 markets ranks as the sixth-highest quarterly reading on record -- and by far the strongest reading since the beginning of the recovery, according to analysis presented at the State of the U.S. Industrial Market 2013 Review and Forecast by CoStar Director of Industrial Research Rene Circ and Senior Real Estate Economist Shaw Lupton.

For the full year of 2013, total U.S. warehouse absorption reached 162.6 million square feet in the top 210 markets, surpassing 2012's totals.

The U.S. industrial vacancy rate ended 2013 at 8%, a 95-basis-point decline from 2012, with 162 of 210 markets showing declines in vacancy. In fact, at 7.6%, the vacancy rate for the top 54 U.S. markets dipped slightly below the lowest quarterly vacancy of the last cycle. Almost every major market has seen year-over-year occupancy gains, led by a pair of Keystone State markets: Harrisburg and Lehigh Valley, PA.

"Right now, we're seeing vacancies on a national level lower than the entire period of the last cycle," said Rene Circ, director of industrial research. "You have to go back to before the bursting of the Internet bubble in the early 2000s to see vacancies for U.S. industrial space below that 7.6% number."

A total of 162 out of 210 markets showed positive net absorption for a total of 162.6 million square feet, a strong 39% increase over the 117 million square feet in 2012. Dallas, Inland Empire, Chicago, Atlanta, Columbus, Cincinnati and Memphis led the gainers, while Northern New Jersey lagged with 150,000 square feet of negative absorption.

Spec Construction Ramping Up

New supply, which hasn’t been a major issue in the warehouse market up until this point, is now beginning to ramp up. In the last year, most markets have started to move into what the analysts termed the late expansionary phase, where most major warehouse markets inevitably begin to see new construction exert pressure on occupancies.

Developers delivered 80.6 million square feet in 2013. However, the 82 million under construction at end of December has jumped to 98 million in the first few weeks of 2014. Four of the 18 big boxes larger than 900,000 square feet currently under construction, and 36 of the 50 buildings larger than 500,000 square feet, are being built on speculation.

The Inland Empire, CA and Dallas/Fort Worth warehouse markets are running neck and neck as the strongest in terms of both demand and new supply. About 9.4 million square feet was completed in the Inland Empire last year, and the 11.6 million square feet under construction at the end of has jumped to nearly 14 million in subsequent weeks. In addition, Houston, Chicago and Phoenix are also logging strong levels of new supply.

Asking rent growth was also very strong across most markets, with the national average of $4.81 per square foot up 2.5% over 2012. Growth was even stronger in the top 54 markets at 3.8%, showing that the recovery is catching a little better foothold in larger markets while continuing to drag a bit in smaller metros.

In certain supply constrained markets, year-over-year rent growth has been eye opening, including Edison, NJ at 9.6%; Los Angeles, 8.9%; Orange County, 7.9% and Miami, 7.5%. That said, there is runway for growth as rents are still well below their peaks in most markets.

E-Commerce, Logistics Scout For Space

Retailers and logistics companies remain very active and e-commerce continues to drive demand for both pure plays like Amazon and among traditional retailers like, which took 1.2 million square feet in the recently completed Liberty Property Trust project in the Lehigh Valley, as well as another 788,000 square feet from Hillwood in the Alliance Park in the Dallas market.

Craig Meyer, president of industrial brokerage at JLL, dubbed 2014 "year of the distribution center" as a result of the high demand early in the year from e-commerce and other users who are in the market for large blocks of sophisticated space.

"Modern space with proximity to population centers and a robust logistics infrastructure will dominate the industrial real estate sector in 2014," said Meyer, who attributed 40% of current big-box industrial requirements as directly related to e-commerce -- a sector that’s growing globally by 20% annually as retailers develop new real estate models to support their omni-channel logistics models.

Among the more notable deals were retailer Restoration Hardware's lease for 850,000 square feet in Dallas’s Great SW/Arlington submarket. Other notable companies recently leasing space of more than 500,000 square feet include Deckers Outdoor Corp. in the Inland Empire, Sephora Americas in Baltimore, CEVA Logistics in Nashville, Trader Joe’s in Chicago, Excel Logistics in the Inland Empire, GENCO in Memphis, and Owens & Minor in Chicago.

CoStar’s PPR forecasting and analytics company is tracking 160 new leases of more than 100,000 square for a total of 35 million square feet across the U.S. in 2014. As of January 2014, leases for new space that tenants will absorb in 2014 totals 92 million square feet.

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