Savannah, GA. – February 23, 2015 – A recent CBRE report has found that 2014 ended on a high note, with fourth-quarter absorption reaching the highest point since 2005, rents rising nearly 5%, and new deliveries growing almost 100% over 2013. Some of the information uncovered includes the following:
National Tenant/User Perspectives
Ecommerce and its impact on retail of all stripes remains the largest stimulant of big box distribution demand with over 50 million sq. ft. of ecommerce users in the market.
Tenant Demand – 19 quarters of consecutive positive net absorption pushing occupancy to 89.7% - 50 basis points from the previous peak.
Slowdown at the 29 West Coast ports has forced supply chain users to explore alternate methods of importing goods which has boosted demand on the East Coast and near air freight hubs.
The increasing complexity of modern supply chains and need to diversify modes of transportation across the supply chain has pushed demand into secondary markets well located along rail and interstate highways, for example Kansas City and Indianapolis
National Landlord/Owner Perspectives
Development which has been slow to return in the current cycle, grew 100% in 2014 with 115 million sq. ft. delivered and is projected to grow another 40% in 2015.
Construction starts are expected to remain strong with an average 140 million sq. ft. projected to deliver in 2016 and 2017.
Due to the unique needs of large ecommerce and distribution users (higher clear heights, excess car and truck parking, and increased power), Class A big box supply has become extremely tight. This has led to an outsized portion of the new development in that category – 75-80% new deliveries despite representing 30% of supply.
With demand running above long-term averages and new supply slow to come on line, rents have grown rapidly – up 4.8% in 2014 and projected to grow another 5% in 2015.
Capital Markets Perspectives
Preliminary results of CBRE’s annual “Global Investor Intentions” survey found that industrial is the preferred property type among North American investors. The industrial sector was selected as the “most attractive for investment purchases in 2015” by 33% of survey respondents.
Acquisitions of industrial assets in the U.S. rose 13% last year to $54 billion, the largest total since 2007. CBRE Research projects the investment volume to rise 10-15% in 2015 that will take the total to a newrecord high.
Investor sentiment is moving towards value add properties as the greatest decline in cap rates in the second half of 2014 were in value add and riskier stabilized assets.
In 2014, global capital acquired $1.8 billion of industrial assets, only about 7% of total foreign investment in the U.S. The largest foreign buyers were Canada, United Arab Emirates and Norway.Chicago was the largest target market. CBRE Research expects greater foreign investment in the sectorin 2015 based in part on the increasing number and level of inquiries about U.S. real estate from globalsources.
CBRE Canada’s quarterly survey of cap rates in the nine major Canadian markets found that Class A industrial assets were trading at an average 6.0% in Q4 2014 and 6.9% for Class B properties. Class Arates inched down in Q4, due largely to more aggressive pricing in Toronto and Montreal, while Class Bremained stable.
Regional Perspectives Northeastern & Mid-Atlantic United States
Northern Virginia – Data center users and government the primary drivers of growth due to proximity to Washington D.C.
Baltimore – Food and beverage users driving demand with several large freezer/cooler requirements in the market for existing space and new development.
Eastern PA/Lehigh Valley – 6 million sq. ft. of spec under construction with another 2-3 million sq. ft. to break ground this quarter and another 4 million sq. ft. planned for first half 2015.
Pittsburgh – Manufacturing demand has returned to the region led by several Chinese companies which are looking to locate in Western PA due to declining energy prices.
Southern New Jersey – Class A supply is tight and, with few suitable development sites, land prices have increased to $10-13 per FAR sq. ft.
Southeastern United States
Norfolk / Hampton Roads, VA – Record port volumes has spurred increased user and investor demand for distribution space.
Charleston, SC – Port of Charleston has become main export point for resin which has brought demand from rail users who bring the product to the port for shipment.
Miami – Growth of imports of perishable items though the Port of Miami has driven demand for freezer cooler facilities.
Orlando – Opening of CSX intermodal facility will create a new market for big box distribution in 2015 and beyond.
Atlanta – Investment sales are projected to hit record levels in 2015 – over $20 billion.
Central United States
Chicago - Significant spec projects to come on line in 2015 which should slow down the record breaking absorption of the previous two years.
Cincinnati – Only one large (over 300,000 sq. ft.) space currently available with no new big box developments ready to be delivered in early 2015.
Tulsa, OK – Energy users represent two thirds of demand so market is cautious in early 2015 with energy uncertainty.
Houston – In the short-term, market to remain very strong despite concerns over energy prices with port activity and petrochemical users driving demand.
Dallas – User demand shifting to smaller requirements. Big box has dominated but current demand is most felt in the 100,000 to 200,000 sq. ft. range.
Western United States
Denver – More large users (over 300,000 sq. ft.) than ever in the market with very few choices. Development has responded with a strong BTS market and a significant portion of spec pre-leased.
Central Valley / Stockton, CA – Extreme lack of space in the Class A bulk market with demand running at 2-3 times supply.
South Bay – Vacancy at 1.6% with very little new supply under construction which will push rents 5-7% in 2015.
Orange County – Class A supply is gone (2.7% overall vacancy) so users are looking to Class B product. Rent spread between A and B is compressing quickly.
Phoenix – most of the vacancy is in the big box segment. Smaller user demand is the backbone of the market with food and consumer products users predominant.
The national industrial availability rate has dropped by 30 basis points (bps) year-over-year to 5.5% in Q4 2014, however, the vacancy rate is down 60 bps over the same period to an exceptionally low 3.7%.
In response to this low availability environment, industrial construction activity across the country reached 19.5 million sq. ft. under development in Q4 2014, which is up 56% over Q4 2013. Toronto and Calgary are leading the pack at 7.0 million sq. ft. and 5.2 million sq. ft., respectively.Even with the drop in energy prices, annual net absorption in Calgary was 3.7 million sq. ft. in 2014, this ranks 2014 net absorption as the second-highest over the last decade, with 2006 ranking first with 6.5million sq. ft.
Despite a weak fourth quarter with negative net absorption, Montreal’s industrial market achieved just under 4.0 million sq. ft. of positive net absorption in 2014. Transportation and Warehousing companies,and those involved in Wholesale Trade, accounted for most of the leasing activity in Q4 2014.
In Vancouver, the average net rent remained stable at CAD$8.08/sq. ft./annum, while land costs at $1.2 million per acre and sale prices at $199 per sq. ft., increased modestly.
Ottawa experienced its strongest quarter of leasing activity in three years with 280,000 sq. ft. of positive net absorption. In order to address concerns over industrial land scarcity, the City of Ottawahas commenced a review of its available employment lands.
Halifax’s 132,000 sq. ft. of new supply in Q4 2014 is the highest influx of new supply in its industrial market since Q2 2013. This new supply is the result of five properties coming online. In Q4 2014, therewas only 37,000 sq. ft. under construction.
The London industrial market continues to experience a shortage of high quality industrial buildings available for sale. Although availability in Q4 2014 rose to 13.6%, there is still a lack of high qualityindustrial facilities.
The industrial market in Edmonton remained resilient against oil price declines. With the country’s lowest availability rate, at 3.8%, and the highest average net rent, at CAD$11.08/sq. ft./annum,Edmonton’s industrial market continues to display its strength.
Mexican annual industrial output (seasonally adjusted) increased 2.0% in December 2014, with strong annual increases in construction (5.9%) and manufactures (4.2%). In 2014, main industrial Real Estatedemand was led by tenants from the automotive (industrial parks for suppliers), logistics (distributioncenters) and food producers (production plants) industries, especially in growing markets such as Northern Mexico City, Monterrey, Guanajuato and Queretaro.
The Bajio region continues to show growing activity. In 2014, inventory reached 67.2 million sq. ft. (the second largest in Central Mexico, after Mexico City), while vacancy rates were 5.6%. Annual netabsorption was 13.9 million sq. ft. Monterrey is gaining dynamism with 2014 net absorption at 4.3million sq. ft.; and a vacancy rate of 9.6%.
Strong industrial demand from logistics, food manufacturers and automotive companies is encouraging real estate activity in the Metropolitan Mexico City Area industrial market showing important levels ofnet absorption with 6.5 million sq. ft. in 2014.
Brazilian economy weakened last year, and the government is trying to implement new policies in 2015 to control inflation and public debt. These needed economic adjustments may not have visible effect inthe short term, especially with a soft performance of China and the European Union investment.However, it is expected that it will encourage foreign investment and growth in the long run.
Despite the economic challenges, absorption of the new supply in São Paulo continues at a steady pace based in current demand, with an overall trend for 2015 for a slight drop in asking prices.
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