Posted on December 15, 2015 · Posted in Industrial / Flex, Investments, Land, Office

Demand for new industrial product in the US has stayed well ahead of the amount delivered, further brightening prospects for the growing number of investors hunting for deals in the sector.

That’s according to the latest market report by Avison Young’s Chicago-based industrial capital markets group. The demand has remained robust even as speculative construction of warehouse, distribution and flex space has accelerated in many markets. At the third-quarter mark of 2015 US developers had delivered projects totaling more than 147 million square feet of space, a 40% increase from one year ago, and a 240% increase from just three years ago.

Furthermore, researchers continue to find record and near-record low vacancy rates in many markets, increasing the desire among investors to include industrial properties in their portfolios, especially large distribution and warehouse spaces. Investment sales have been quite strong, totaling $2.6 billion in the first three quarters of 2015, and have already surpassed the totals of $2.4 billion for 2014 and $1.8 billion for 2013. The 2015 figure is roughly double the volume seen in 2012 and 2011.

“Tenant demand is the main driver of speculative construction, but the fact that developers know they have an exit is also important,” Erik Foster, a principal and practice leader at Avison, tells GlobeSt.com. “As it boosts confidence, they will make money and have more equity for the next project. But even though the amount of development has kept increasing, we are still not surpassing the pre-recession levels of speculative construction, and that means the market, however active, has remained disciplined. An important factor in maintaining discipline is that, when neccessary, the development pipeline can be turned off fairly quickly.”

Gateway 673, a new spec in the St. Louis area sold on Aug. 15 for $35M, one of the biggest investments of the 3Q

Gateway 673, a new spec in the St. Louis area sold on Aug. 15 for $35M, one of the biggest investments of the 3Q

When a particular market gets hot, such as the Inland Empire, developers can respond. “It continues to be a strong, strong performer. In fact, the west side of it has become so dense it can almost be considered an infill market.” Developers working in this market now have 17.6 million square feet under construction, and have already completed 15.2 million square feet this year, compared to the 16.6 million delivered in the first three quarters of 2014.

But in Indianapolis, where, as reported in GlobeSt.com, many observers recently began to worry that the pace of speculative construction may have gotten out of hand, Avison Young found that construction numbers experienced a steep drop-off. In the first three quarters of this year, developers there finished 5.7 million square feet, compared to 5.0 million at this point last year. As of now, however, they only have about 800,000 square feet of space still under way.

Atlanta, on the other hand, has followed a very different track. Last year at this time, developers there had only completed 1.3 million square feet, according to the firm, but this year, they have launched 15.5 million square feet of projects.

“It was one of the last markets to recover from the recession,” Foster explains. “And in the near future, those numbers will flatten until that new space gets absorbed. That shows why so many investors are willing to put money into industrial properties. Unlike the office sector, in which developers can work on major projects for years while watching the local market tighten or even sour, in the industrial sector you don’t get overburdened. It’s becoming very well-disciplined and speaks to how much more sophisticated developers are these days.”

 

Source: GlobeSt.

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