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Market Intel, Forecasts & Strategies

Industrial Market Update Q4

The industrial market continues to fly under the radar as the safest and most appealing asset class of commercial real estate. In Q4 2015, “vacancy rates declined and rents increased at a stronger rate than the previous three quarters,” said economist Barbara Byrne Denham in REIS’ Q4 2015 Industrial First Glance report.

Even within the sector, there are some covert success stories. Surprisingly, flex/R&D space is outperforming warehouse/distribution space. “Often the laggard to warehouse/distribution, the flex/R&D market outshined its sibling property type for the second quarter in a row.”

Developers seem to have not yet taken note of these facts. For flex/R&D, net absorption jumped to 4.4 million SF in Q4 “dwarfing” new construction, which actually fell to 1 million SF (down from 1.4 million SF is Q3). Asking and effective rents also increased 0.6% in the quarter to an average market rent of $9.17 per SF.

Of the 47 markets REIS studied, 41 saw a vacancy rate decline for the flex/R&D space as opposed to only 28 for the warehouse/distribution market. Vacancy is down to 11.8% for Flex/R&D, 100 basis points lower than year-end 2014.

The numbers are less dramatic for the warehouse/distribution sub-sector. The vacancy rate for warehouse/distribution fell (10 basis points to 10.6% down from 10.7% in the third quarter and 11.2% at the end of 2014).

Net absorption totaled 22.5 million SF and new construction totaled 18 million SF in the fourth quarter, slightly down from the previous quarter’s 27.1 million SF of net absorption and 18.9 million SF of new construction. The average market rent increased 0.7% in the quarter to $4.98 per square foot. Effective rents also increased 0.7%.

“Once again, new construction was concentrated in a handful of markets led by Dallas (3.3 million SF), Chicago (2.8 million SF) and Atlanta (2.2 million SF).”

According to REoptimizerwho named Atlanta as one of the Best Warehouse Space Markets for 2016, “Atlanta has the distinction of being the only major metropolitan area in the country where supply of large contiguous spaces currently outpaces demand. The healthy supply is not stopping developers, though, since millions of square feet of brand new space will be coming online during 2016”.

Not only is supply outpacing demand, but Atlanta is a city “well placed for regional facilities” since it’s close to the Eastern Seaboard and is home to Hartsfield-Jackson International Airport, which has been the world’s busiest airport for 17 years.  

“Given the health of the fundamentals in both warehouse/ distribution and flex/R&D markets (low new construction and steady net absorption growth), we remain optimistic that the industrial market will continue to improve at the same steady rate going forward,” said Denham.