May 23, 2017

CBRE report says industrial property demand slowed in first quarter

High costs, tight supply give users pause, report says.

By DC Velocity Staff

The extraordinarily good times for the U.S. industrial property sector are perhaps a little too good for some folks.

For the first time since the third quarter of 2010, when the sector began its historic multi-year run after emerging from the Great Recession, leasing demand in the first quarter fell short of new construction, according to data provided on Friday by Los Angeles-based real estate and services giant CBRE Group Inc. The firm added, however, that the gap between the two was narrow and that it had minimal impact on industrial availability.

Net absorption, which measures occupancy rates at the beginning and end of each reporting period and factors in vacancies and new construction, decreased quarter over quarter and year over year, CBRE said. This pushed the so-called nationwide availability rate up slightly to 8 percent, CBRE said.

According to the report, users of industrial space are "extending their decision-making process due to rising costs and lack of available supply." Another factor contributing to their hesitancy is a shortage of available warehouse workers, the report found.

Yet the number of tenants looking for space has not declined, meaning the market will not become oversupplied this year despite an expected uptick in deliveries, the report said. The prime "big box" facility favored by high-volume e-commerce companies remains in huge demand, CBRE said. The findings came from surveys of 950 CBRE brokers nationwide.

Industrial space has been absorbed so steadily over the past seven years that occupancy rates today stand at 95.2 percent, the highest level since CBRE began tracking the metric in 2002. The net rent index—which calculates rents excluding expenses and is considered the best gauge of market forces that drive pricing—rose 1.6 percent sequentially in the first quarter, and 6.7 percent year over year to $6.24 per square foot, the highest levels since 1980, CBRE said.

In many U.S. markets, vacancy rates have dropped to as low as 2 percent. Because of this, most of the new industrial deliveries are speculative construction, an indication that developers are so confident in the continuation of current trends that they will begin work on a project without any firm buyer or tenant.

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