North American Industrial Highlights | 1Q 2011
The U.S. industrial market started 2011 on an optimistic note, reinforcing the more bullish environment evident in the latter half of 2010. Solid demand for warehouse space in most regions coupled with minimal construction encouraged another substantial decline in vacancy. Vacancies dropped in many markets reflected by every region reporting a lower vacancy rate for the quarter. With leasing activity up and a degree of optimism in most markets, warehouse rents halted a three-year decline to register no change over the quarter.
With the economy registering modest growth in the first three months of the year, and reasonable growth anticipated in coming quarters, demand for warehouse space is only expected to increase as the year progresses. A key pillar of support for the U.S. industrial market is the continued strength in manufacturing, particularly goods intended for export. Exports continued to ratchet higher with March trade data showing a 19.0 percent year-over-year increase. The healthy state of manufacturing is reflected in the Institute for Supply Management (ISM) manufacturing index for April, which remained elevated at 60.4 (well above the critical 50 level indicating expansion). All indications are that the reinvigorated manufacturing sector is set to be the cornerstone of the economic recovery and willbe a key source of growth for the U.S. industrial market.
Although signs of a true rebound in the warehouse market may not be seen until 2012, almost all economic indicators suggest demand for warehouse space will only increase during 2011. Combined with very limited warehouse construction, vacancy rates are certain to go significantly lower in the coming quarters. Rents, however, are unlikely to increase in any meaningful way until well into 2012. For most landlords and investors, the most that can be expected is more leasing activity and rising occupancies.
Occupancies rise for fourth consecutive quarter. For the fourth consecutive three-month period, industrial markets registered an increase in occupied space. During the first quarter, net absorption totaled 25.7 million square feet (MSF)—a small drop from the fourth quarter, when occupied space increased by 28.6 MSF, but in sharp contrast the 19.3 MSF of industrial space returned to the market in the first quarter of 2010. Of the 59 markets tracked in the U.S., 40 (68 percent) reported positive absorption during the first quarter; however, the West and South accounted for the lion’s share of the country’s absorption, with occupied space increasing by 9.9 MSF and 10.5 MSF respectively. Canadian markets began the year in robust fashion with first quarter absorption reaching almost 6.0 MSF, considerably above the 4.0 MSF quarterly averages in 2010.
Warehouse construction drops back to first-half 2010 levels. First quarter completions totaled 6.0 MSF, a modest decrease from the fourth quarter when 9.4 MSF were delivered to the market, and back to delivery levels registered in the first half of 2010. Of the 6.0 MSF delivered, 86 percent was build-to-suit and the balance was classified as speculative (spec) construction. Last quarter, build-to-suit deliveries accounted for 71 percent of completions. In the coming quarters construction is anticipated to be largely build-to-suit, with only 35 percent under construction at year end classified as speculative, but there were early signs the balance between build-to-suit and spec construction will be more even as early as 2012. Quarter-end construction activity totaled 29.4 MSF, a modest increase from the 22.7 MSF underway at the end of the fourth quarter, but well below the 107.0 MSF recorded two years ago. Canadian construction remained subdued with 1.2 MSF completed in Q1, broadly in line with construction levels experienced in 2010.
U.S. industrial vacancies drop by further 15 basis points. The U.S. industrial warehouse vacancy rate dropped 15 basis points during the first quarter to register 10.47 percent. This was in addition to a significant drop in the national vacancy rate in the fourth quarter when vacancies fell by 22 basis points. Even though the national average dropped quite significantly during the quarter, many markets are still seeing vacancies go higher: almost 40 percent of U.S. markets (23 out of 59) saw vacancies increase in Q1. Canadian warehouse vacancies by comparison were sharply lower, falling by 33 basis points during the quarter to average 5.30 percent.
After 12 quarterly declines, industrial rents hold steady. After three years of consistently lower rents, industrial warehouse lease rates held steady in the first quarter. Warehouse rents registered $4.76 per square foot at the end of the quarter. Bulk warehouse rents also held steady at $4.37 per square foot, while both flex and R&D rents slipped $0.07 and $0.55 per square foot respectively. Canadian industrial rents were mixed during the quarter with warehouse and flex lease rates up, while bulk and R&D fell marginally.