Can a silver lining be found within the sputtering U.S. economy? After showing tepid positive momentum, growing at an annual rate of 2.5% in the second half of 2011 and 1.9% in the first quarter, the U.S. economy has waned. Now added to the uncertainty of the European debt crisis and anemic U.S. job growth is China’s slowing economy and the looming threat of the “fiscal cliff”. The result: cautious corporate and consumer attitudes and mounting volatility in global equity market.
In contrast, however, the U.S. industrial real estate sector is showing continued momentum, a rebound that started in 2011. As of mid-year, the industrial sector continued to post healthy demand and declining vacancies. Operating fundamentals continue to improve across the country with the most notable gains in the warehouse sector. Newer bulk distribution buildings in first tier markets are achieving single digit vacancy levels, widening the price gap between Class A and B/C space. As industrial users embrace both long-term strategic planning and favorable economics, a sustained period of rental rate appreciation looms.
Strong demand for big-box quality space has burned off Class A bulk inventory in major logistics markets and has triggered an increase in both build–to–suit and speculative development activity. In 2011, 29.6 msf of industrial space was added to the market nationally. By mid-year 2012, 17.5 msf of new supply was added to the inventory and 7.9 msf of that was built on a speculative basis. An additional 49.2 msf is currently under construction with 17.0 msf of speculative space scheduled to be delivered by year-end.
Industrial sector sales activity has also rebounded and competition has been most aggressive for stabilized core product in the coastal markets followed by the inland logistics hubs. At the same time, prices at the lower end have noticeably stabilized or are beginning to creep up (but remain far below pre-recession peaks), triggering a wave of delayed user acquisitions. Institutional investors are also showing a willingness to stretch acquisition parameters and venture beyond a few select markets as market assumptions show significant improvement.
Although slow, the pace of economic growth is healthy enough for continued recovery in market fundamentals. The remainder of 2012 should also see the U.S. industrial market continue to benefit from its emergence as a stable, outperforming asset class. Limited supply of quality product in major logistic markets will add to cap rate compression for well-located core assets.
Maria Sicola, Head of Research, Americas
Tina Arambulo, Industrial Research Director