After Years of Inactivity By Developers, 2012 Will Likely Be A Turning Point For New Warehouse Supply
With the gradual return of economic growth, including higher levels of manufacturing and consumer spending, the vacancy rate for U.S. warehouses continued to decline at the end of 2011 as the property sector was buoyed by its strongest quarter for net absorption since late 2008.
The vacancy rate tracked across 210 markets by Property and Portfolio Research (PPR), CoStar’s analytics and forecasting division, declined to 9.6% in the fourth quarter, down by a slight 24 basis points from the previous three months, and a nearly 80-basis-point decline from the same period a year ago, according to data presented at CoStar’s 2011 Industrial Outlook and Review.
The 40 million square feet of absorption in the fourth quarter was an increase over both the previous quarter’s 30 million square feet and the 23 million square feet absorbed in fourth-quarter 2010. About two-thirds of CoStar-tracked metros showed positive absorption and decreases in vacancy rates in their industry property sectors.
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With six straight quarters of positive absorption now, warehouses racked up about 110 million square feet of net absorption in 2011, the strongest year since 2008.
Meanwhile, construction of new
warehouse space remained at a historically low ebb, “Overall, it looks like a pretty positive picture on the demand side," said Rene Circ, the recently named director of industrial research for PPR. Circ co-presented the review this week with PPR Managing Director Hans Nordby and senior real estate economist Shaw Lupton. "One would hope we were further along, but overall, it’s stable and positive," Circ said.
Wide Gap remans Between What's Vacant and What's Available
As it has for some time, demand growth as reflected by gross absorption -- the total amount of
industrial space leased, not counting space that has been vacated -- remained flat in the fourth quarter. Along with resumed demand, a sharp reduction in the number of company closures, downsizing and consolidations has helped keep the amount of vacated space in check.
While net asking prices are stabilizing, rents remain the laggards in the warehouse story. Asking rents improved in 88 markets but worsened in 122 markets in the fourth quarter. "Rents are way down and have a pretty long way to go," Circ noted.
Rents aren’t yet growing because the gap remains wide between the vacancy rate and the availability rate. The former is based on space that is actually vacant, while availability is based on space being marketed by landlords who are anticipating vacancy. The availability rate remains above 14%, Circ said.
"It’s hard to start pushing rents when there is 14% of stock available. Until that spread narrows, it’s hard to assume strong rent growth."
A majority of absorption in the quarter was conentrated in 10 markets, which accounted for about half of 2011’s net absorption, led by more than 12.2 million square feet of net space occupied in the Inland Empire of Southern California. That market benefited from a rise in container traffic at the ports of Los Angeles and Long Beach, which posted their highest volumes since before the recession. The Inland Empire saw the top deal of 2011, Hewlett Packard’s lease of 1.4 million square feet in two buildings in San Bernardino.
Dallas and Atlanta also posted strong absorption, which was expected, Lupton said. However, in one of the year’s biggest surprises, Detroit, which has suffered economic doldrums for the past decade, logged 6.4 million square feet of net absorption as the auto industry and other Midwest manufacturing has recovered, the fourth-highest total among metros for 2011.
"We’re seeing large deals linked to consumer goods companies, third-party logistics firms, and online retailers that are driving large takedowns of space," Lupton said, noting that Amazon.com took space in Phoenix, Indianapolis, Philadelphia, Seattle and Nashville totaling more than 3.5 million square feet.
While some of the first speculative warehouse construction commenced in the Inland Empire last year, the amount of new supply in the pipeline remains almost unbelievably low, Circ said. However, between rising demand and obsolescence of aging buildings, 2012 will be a turning point for new construction, he added.