Key market bellwethers – increased leasing velocity; the reemergence of speculative construction; and strong retail, manufacturing and transportation industry performance – signal the start of what very likely will be a positive year for industrial real estate in the United States.
The market clearly transitioned into recovery in 2011, after beginning to gain momentum during the second half of 2010. Leasing activity last year exceeded 417 million square feet. This was 20.5 percent higher than the 345.8 million square feet leased in 2010 and represented the highest level of activity since 2007. As a result, vacancy rates have stabilized in almost every market across the country. The current national average of 10.0 percent reflects a decrease of 80 basis points from year-end 2010.
Consider Southern California. As the world’s largest industrial hub, this market historically is the first to enter a down cycle yet also traditionally leads the way out. True to form, the Greater Los Angeles market topped the nation in leasing activity, with 36.7 million square feet in transactions. Its vacancy rate of 4.9 percent is the lowest in the country.
More surprisingly, Chicago came in as a close second for leasing volume, with 30.3 million square feet in lease transactions. While always a strong inland hub, the Windy City is not known as one of the country’s most exciting markets. Within this context, its impressive performance is a very good sign. Markets with the largest year-over-year gains included Central & Northern New Jersey (up 83.2 percent), Phoenix (up 76.1 percent), Miami (up 44.2 percent) and Dallas/Fort Worth (up 32.4 percent).
The industrial market continues to benefit from historically low construction levels, with only 29.6 million square feet added in 2011. Of that, only 4.4 million square feet was speculative development. For perspective, speculative building dominated the market in 2008, making up 78.5 percent of the 176 million square feet of new supply added that year.
Now, with demand outpacing supply in many key markets, we are beginning to see speculative development pop up, but still in a conservative manner. These projects, located exclusively in tight markets like eastern Pennsylvania, Southern California and Chicago, indicate growing optimism among industrial property owners.
Their enthusiasm is supported by positive trending in industries that directly impact industrial real estate performance. Retail sales in 2011 totaled a record $4.7 trillion, a gain of 7.9 percent over 2010 (the largest percentage increase since 1999).
Additionally, the manufacturing sector expanded in January for the 30th consecutive month and continues as one of the main growth drivers for the U.S. economy. As more product is created in the United States and delivered to consumers both domestically and abroad, the transportation industry is reaping the benefits. The rail, trucking and shipping sectors all experienced positive growth during 2011.
Still, the market remains vulnerable to a variety of geopolitical factors that could stall growth here and elsewhere. For that reason, our optimism remains somewhat guarded. But should conditions stay the course, users and investors will continue to shake off lingering doubts regarding the validity of the economic recovery. This positions the industrial market for continued progress in 2012