After Record 2015 Investment Sales, Limited Availability of Available High-Quality Warehouse Projects Expected to Crimp Buyers in 2016
CoStar Group analysts forecast that, for the first time since 2007, more than half of new logistics projects planned for construction this year will start without a tenant commitment, as merchant builders re-enter the market with large-scale spec projects, seeking to capitalize on institutional investor appetite for modern bulk-warehouse logistics buildings.
With the U.S. vacancy rate for such space falling to 7.8% in the fourth quarter of 2015, the lowest since 1999, new supply is expected to reach a peak for the cycle with more than 150 million square feet of new industrial space completed this year.
Steady GDP growth and rising e-commerce consumer sales and corresponding fulfillment demand has seen tenants absorb available logistics space at a higher rate than construction in 2015, said CoStar Director of Industrial Research Rene Circ, who recently presented the 2015 U.S. Industrial Real Estate Review and Forecast with Senior Real Estate Economist Shaw Lupton.
Rents for light-industrial and logistics space increased an overall 6% in 2015. Several U.S. markets posted double-digit rate increases, including the San Francisco Bay Area, Silicon Valley, the Inland Empire, Denver, Nashville, Raleigh, NC, Harrisburg, PA and Los Angeles. By comparison, rent growth for logistics properties in the U.S. historically averages just 1% annually.
Despite a shortage of institutional-grade product available on the investment sales market, 2015 saw several large portfolio purchases by foreign buyers, such as the $8.1 billion acquisition of Blackstone's IndCor Properties by Singapore-based Global Logistic Properties. That sale and other major acquisitions, boosted total U.S. sales volume of industrial property by 37% in 2015 to more than $80 billion -- the largest percentage increase among the major commercial property types.
With another solid year for absorption at 150 million square feet, demand for logistics space grew by 3.3% last year while supply increased 2.6% -- both well above the 2% rates of supply and demand increase for the apartment sector.
With developers increasingly ramping up new spec supply in the nation’s leading warehouse and distribution hubs, occupancy gains were strongest in smaller, second-tier markets where demand was largely driven by local and regional economic gains, such as Austin, Raleigh, Las Vegas, San Diego and Detroit.
Overall, CoStar forecasts the U.S. vacancy rate for logistics space to top out at 8.7% by 2020, still well below the long-term average of 10.6%. Construction of light-industrial space is expected to lag larger logistics facilities, resulting in further vacancy compression over the next 12 months.
The Inland Empire warehouse market in Southern California led the nation with 19.5 million square feet of net absorption in logistics space last year. Chicago followed at 16.7 million square and Dallas posted a strong 13.6 million square feet. Those markets also posted the largest increase in new deliveries at 20.5 million, 15.2 million and 15.3 million square feet, respectively.
New supply is expected to accelerate by even larger numbers this year. Dallas logged 21.1 million square feet of new logistics starts in 20 new buildings during 2015, followed by 20.6 million square feet in the Inland Empire, 14.2 million square feet in Chicago and about 13 million square feet in Atlanta.
Spec development is ramping up as build-to-suit construction for major e-commerce supply chains, such as Amazon’s fulfillment and sortation centers, is starting to wind down.
CoStar estimates that 180 million square feet of occupied big-box industrial space is directly attributable to e-commerce demand over the last decade, a trend expected to continue with online sales rising 4.2% and 16.7% in the fourth quarter and full year, respectively, to$329.5 billion in 2015.
Most industrial real estate firms remain bullish on the market's prospects in 2016.
“We feel good about the start of the year. We're certainly nervous about the economy, but less so about supply,” said Marshall Loeb, president and CEO of EastGroup Properties (NYSE: EGP
“We believe we’ll continue to see strong rent growth in most if not all of our markets,” said Matt Murphy, CFO of DCT Industrial Trust (NYSE: DCT
With availabilities at all-time lows and continuing to decline, demand outpaced supply by over 90 million square feet in 2015, supporting further rent growth and new development starts this year, said James Connor, president and CEO of Duke Realty Corp. (NYSE: DRE
"Assuming the markets reach supply demand equilibrium in late 2016 or early 2017, we still see opportunity for rent growth, albeit at slower levels than the past few years," Connor said.