The industrial property sector is being propped up by demand for big box distribution centers in major U.S. markets, but activity is slowly filtering to the second tier markets, according to the Jones Lang LaSalle’s Spring Industrial Outlook. Jones Lang LaSalle, a financial and professional services firm specializing in real estate, says overall vacancy rates have now dipped to ten percent across the nation. Locations such as California’s Inland Empire and the Philadelphia/Harrisburg metro market are still leading the charge with vacancy rates falling by 80 and 40 basis points respectively.
“It’s not just the Inland Empire and Central Pennsylvania showing a decline in vacancy rates, we are seeing further evidence of leasing activity in cities such as Atlanta and Dallas and other logistics hubs like Miami, Phoenix, Seattle and Denver,” said Jones Lang LaSalle International Director, Craig Meyer. “Demand for space has been driven by retail, consumer goods, food and beverage firms and the third party logistics (3PL) companies that support them.”
Chicago has experienced the most dramatic surge in space demand with 7.7 million square feet absorbed in the first quarter alone and this demand was driven by 3PL companies. Dallas/Fort Worth continues to benefit from consistent demand, boasting 3.1 million square feet of space absorption in the first quarter, while Atlanta, Detroit and Pittsburgh realized significant gains of 1.3 million square feet.
“It is evident that companies seeking big blocks of distribution space of 500,000 square feet or greater are having increasing difficulty,” said Meyer. “These buildings have been in high demand and in some markets we are seeing the return of build-to-suit activity and in locations like the Inland Empire and Central Pennsylvania, the beginning of ‘spec development’.”
Overall construction in the industrial real estate sector has been muted with only 16.6 million square feet of projects underway in the first quarter; 85 percent of the space is preleased. Only 6.2 million square feet of new space was delivered in the first quarter – predominantly in Atlanta and Philadelphia, and 92.5 percent was pre-leased.
Even with a rise in demand, albeit slow, the average national rental rates for industrial space across the country fell by 0.7 percent to $4.24 per square foot in the first quarter. Cities such as Chicago, Houston, Indianapolis, Seattle and St. Louis have seen rents stabilize but the most expensive location remains San Diego at $7.92 per square foot, while Memphis is the cheapest at $2.38 per square foot.
“While the larger logistics markets are healthy and leasing activity is returning to the next tier of secondary markets, we are still in a relatively slow growth economy. We really need to see stronger leasing activity in the second tier markets before the industrial market returns to full health,” concluded Meyer.