Buoyed by improvements in the overall economy and the housing market, the U.S. industrial real estate sector continued to strengthen in first quarter 2013 and is set for a promising future.
That was the consensus of a panel of experts on a recent episode of the “Commercial Real Estate Show” radio program. The show provided an enlightening look at industrial real estate’s performance in the first quarter as my guests and I discussed vacancy rates, investment sales, active tenants, cap rates and much more.
Good News
Net absorption of industrial real estate in the 54 largest U.S. markets totaled 25 million sq. ft. in first quarter, said Rene Circ, director of research for PPR, a CoStar-owned firm. That figure, while a good bit below the 40 million sq. ft. of absorption typical of a pre-recession quarter, is still about three times larger than first quarter 2012’s total, according to Circ.
At the same time that demand is growing, new supply continues to remain “exceptionally low,” Circ said. About 13 million sq. ft. feet of new industrial facilities were delivered in the United States during the first quarter, and roughly 38 million sq. ft. of facilities were under construction at the end of March. Both figures are well below historical averages, Circ noted.
Consequently, the national vacancy rate for the industrial sector dipped to 8.2 percent in the first quarter, a 20-basis-point decline from the preceding quarter and a 100-basis-point drop from one year earlier. The average rent increased by 2.5 percent on a year-over-year basis during the quarter, noted Circ, calling it “a really good quarter.” The national vacancy rate could drop to about 7.7 percent by year’s end, he added.
Sales Are Growing
Like many of the other important indicators for the sector, investment sales of industrial properties are trending in a positive direction. According to Circ, about $20 billion of industrial investment sales were completed last year, which represents about a 30 percent increase from 2011.
“Demand for this sector has been pretty strong on the investment side,” Circ said. “We work with a lot of investors, and many investors that historically have not been dedicated industrial investors or even industrial investors at all are calling up and saying, ‘We are interested in this sector.’”
The steadiness of the industrial sector is a large part of its appeal among investors, said Jim Brice, a partner with Holt Lunsford Commercial, a Dallas-based commercial real estate services firm. “It’s not sexy and you don’t have the big spikes in values or rents, which makes it just a good, solid play,” Brice said. “You may not hit a grand slam, but you’re constantly at bat and stroking doubles all the time. It’s just the sector that everyone wants to buy and be a part of.”
Return of the Smaller Tenant
Much of the tenant activity in the past two years has centered on e-commerce firms moving into large distribution facilities, Brice said. However, smaller tenants – those occupying 300,000 square feet or less – have started to return to the sector as suppliers respond to an improving housing market, he added.
“Everything that goes into a house has to be in a warehouse,” Brice said. “So as homebuilding increases, there’s no question [warehousing is] going to increase as well.”
“In the Southeast, we’ve seen the same thing,” I replied. “When the housing markets struggled, we lost a lot of those smaller tenants in industrial properties.”
Industrial-Sized Momentum
The industrial sector has improved to the point that some spec construction is taking place around the country, and REITs are responsible for more than 90 percent of that activity, according to Rob Riner, a partner in the Dallas office of Panattoni Development. “It’s easy for REITs since they don’t have to go do a normal bank loan that other equity sources will sometimes have to do,” he said.
The outlook for industrial real estate is good, or might even be considered great. After living through the recession, most investors are very pleased with hitting doubles.
For information on the U.S. and the Dallas-Fort Worth industrial market, you’re invited to listen to the industrial update show at www.CREshow.com.
Michael Bull, CCIM, is the host of the nationally syndicated "Commercial Real Estate Show" and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta.