Report: Demand for logistics real estate to grow in 2012

Demand for high-end industrial property used for logistics operations will continue to grow into 2012, leading to tightening capacity and rising rents until new supply hits the market later this year, according to a forecast issued late Tuesday by a leading real estate advisory firm.

The vacancy rate for logistics facilities, which peaked at nearly 14 percent at the end of 2009, fell to under 11 percent two years later and is expected to dip into the single digits by the end of 2012, said Dallas-based Grubb & Ellis Co.

The pace of improvement will slow throughout the year, however, as new supply expands at a faster rate than demand, the firm said in its 2012 National Real Estate Forecast report.

The report said new speculative development—where facilities are built with the hopes of landing a qualified occupant—emerged in 2011 after a two-year hibernation. So-called spec development, which last year focused on selected markets like central California's Inland Empire and Pennsylvania's I-78 and I-81 corridors, will spread to 16 major U.S. markets in 2012 as developers and tenants gain more confidence in the resiliency of the logistics segment, which Grubb & Ellis said accounts for one-quarter of all industrial space.

The Inland Empire, which runs east from the Pacific Ocean to California's central core, "saw double-digit rent growth" in the logistics category last year, the report said. This performance "will be repeated by many additional markets in 2012," according to Tim Feemster, senior vice president and national director, logistics, and author of the section of the Grubb & Ellis report that focuses on the logistics segment.

The report did not specify which markets would see growth in "spec" development this year.

Feemster said the logistics segment accounted for more than 70 percent of all industrial real estate demand since the second quarter of 2010. Demand for logistics space turned positive in mid-2010, Feemster said. By contrast, demand for total industrial real estate, which includes warehouses and distribution centers, didn't turn positive until the end of last year.

However, even the broader industrial segment is now experiencing better times, the report found. The market absorbed 110 million square feet of industrial capacity in 2011, up considerably from the 34 million square feet absorbed in the prior year.

Perhaps most significant was that during the past six quarters, the industrial market re-absorbed all of the space that went vacant during the Great Recession. From the fourth quarter of 2008 to the second quarter of 2010, about 153 million square feet of space were returned to the market, according to the report. But from the spring of 2010 through the fourth quarter of 2011, about 160 million square feet were re-absorbed, more than reversing the pattern that held during the worst of the downturn.

The report said the trend of the past six quarters is especially remarkable considering the tepid pace of overall economic growth during 2011.