Can Industrial Pitch the Perfect Game?

by CoyDavidson on June 14, 2013


North American Industrial Highlights – Q1 2013

Over the last two years, North American industrial warehouse markets have pitched a “perfect game” through the eighth inning, to use a baseball analogy. The property type has seen eight successive quarters of declining vacancy rates, with net absorption outpacing new supply more than 2:1.

Recognizing that Canadian markets account for only 10 percent of the North American warehouse space—and these 12 markets have maintained a stable vacancy rate of approximately 5% with relatively no new supply—the improvement in these metrics has largely occurred in the primary 65 U.S. warehouse markets.

  • Can the “perfect game” continue into the ninth? For the eighth straight quarter, the North American vacancy rate declined in the 77 markets tracked by Colliers. Q1 vacancy is down 20 basis points to 8.20% (8.68% among the primary 65 U.S. markets and 4.13% among the 12 primary Canadian markets).
  • Absorption remains strong vs. job growth. Despite anemic job growth below 200,000 per month, demand for industrial warehouse space and modern distribution centers remains strong. On the heels of nearly 71 MSF of net absorption in Q4 2012, the market absorbed another 50.5 MSF in Q1 2013.
  • New Supply is picking up, but is neither excessive nor speculative. New industrial construction this quarter increased by one-third to 40.6 MSF. But put in perspective, this is less than quarterly average net absorption from Q1 2012 to Q1 2013 (45 MSF). And, more than half of this new space is pre-leased or build-to-suit distribution centers for major retailers and manufacturers.
  • Cap rates continue to compress and warehouse prices rise due to increasing investor demand for warehouses. As institutional investors become anxious about the multifamily market and take note of industrial’s perfect game in the making, demand for modern warehouse properties in core port and inland distribution markets is on the rise.

These are reasonable concerns given how real estate values across all asset classes—industrial especially—have climbed in a relatively short period. So, what are the potential “blind spots” that conceal risks to industrial’s perfect game? Read chief economist for Colliers, K.C. Conway’s analysis in the Q1 2013 North American Industrial report.

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