By Kevin Thorpe, Chief Economist, Americas
The U.S. industrial sector posted its 24th consecutive quarter of positive net occupancy gains during the first quarter of 2016, placing the current expansion among the longest on record. A total of 57.8 million square feet (msf) of space was absorbed, up 9.3% from the first quarter a year ago and leaving national vacancy at 6.1%.
This expansion is also among the strongest on record. The U.S. industrial market shed over 182 msf of occupancy during the economic downturn, but it has absorbed more than 990 msf in the expansion. The national industrial vacancy rate continued to decline in the first quarter, falling by 20 basis points (bps) from the prior quarter and 70 bps from the prior year to 6.1%. Industrial vacancy is currently tracking at the lowest level of the past 30 years and is now a full 240 bps below the 10-year historical average.
U.S. industrial rents increased 3.8% in the first quarter compared to a year-ago. Rents rose in 68 of 79 markets tracked by Cushman & Wakefield from the first quarter of 2015 to the first quarter of 2016, with over one-fifth of the country now reporting double-digit gains. In many markets, industrial rents are now either at their historic high or quickly approaching it, and on a national level we are witnessing rental rate appreciation for every industrial product type.
On the development front, 51.7 msf of industrial product was delivered in the first quarter with the majority of deliveries coming online in major industrial markets and primary inland distribution hubs. Speculative projects under construction totaled 109.9 msf in the first quarter, comprising 62.5% of the total 175.8 msf currently under construction.
Construction is certainly ramping up, but it remains well below the peak of the last cycle. Between 2004 and 2009, we saw the delivery of over 776 msf of product; during the expansion that began in 2010 we’ve witnessed 566 msf of deliveries and historic absorption nationally. This shows that we aren’t overbuilding yet, and leasing activity should keep pace with new construction in the majority of markets over the course of 2016.
The top 10 strongest markets in terms of demand for industrial space in the first quarter were Dallas/Ft. Worth, with 6.8 msf of absorption; Central New Jersey, with 5.1 msf; Chicago, with 3.9 msf; the Inland Empire, with 3.7 msf; Atlanta, with 3.3 msf; Detroit, with 2.8 msf; the Pennsylvania I-81/I-78 Distribution Corridor, with 2.7 msf; Philadelphia, with 1.5 msf; Greater Los Angeles, with 1.4 msf; and Phoenix, with 1.4 msf.
The tightest markets in terms of overall vacancy included Denver and Greater Los Angeles, at 2.2%; Orange County, at 2.8%; San Jose, at 3.0%; East Bay, at 3.2%; Cincinnati, at 4.2%; Milwaukee and Portland, at 4.8%; Miami, at 4.9%; and Detroit, at 5.0%.
The outlook for the industrial sector remains promising for 2016, and we expect another year of strong growth. Much of what drives demand for industrial space links to the U.S. consumer, and by most measures, the consumer is feeling confident and spending. With the U.S. economy now showing signs of shaking off the first quarter blues, our forecast calls for net absorption to once again surpass the 200 msf mark. Considering all that transpired in the first quarter, we are well on our way.
Mr. Thorpe is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts. He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Mr. Thorpe has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. He is also frequently quoted in publications.