JLL report forecasts strong demand for U.S. industrial property in '16, record low vacancies

Demand will remain strong for U.S.-based warehouse and distribution center space in 2016 as continued e-commerce growth, the opening of the expanded Panama Canal, and U.S. industrial property's continued appeal to foreign investors combine to drop vacancy rates to all-time lows, real estate and logistics firm JLL said yesterday in its 2016 preview.

The U.S. industrial property market has thrived coming out of the financial crisis and subsequent recession, with rents and sale prices through the third quarter of 2015 ahead of the historical peaks seen in 2007 and 2008, JLL said. National vacancy rates as of the end of the third quarter were at 6.7 percent, a 14-year low. The Chicago-based firm did not specify how low it expects vacancy rates to go during 2016.

Retailers and e-commerce companies are investing in larger distribution and fulfillment centers to meet changing consumer demand and service requirements, JLL said. The strongest demand is being seen at key ports, transshipment points, and large population centers, the firm said.

Surging demand, not curtailed supply, is driving up asking prices and rents, JLL said. In the third quarter of 2015, more than 170 million square feet of industrial space was under construction, up almost 20 percent from the same time last year. Current and projected demand is approximately double that of speculative construction now under way, the firm said. Net absorption—which calculates the amount of occupied square footage at the end of a period minus the occupied amount at the start of that period, including vacated and newly constructed space—will surpass new completions in 2016 for the sixth consecutive year, JLL said.

Many industrial developments are preleased before ground is even broken, and speculative construction is being leased up. These large buildings leased to credit tenants on long-term leases are highly attractive to such global investors as sovereign wealth funds, institutional advisors, and insurance companies that are interested in safe and stable property investments.

Offshore capital invested more than $11.5 billion in U.S. industrial properties in 2015, according to JLL research. Ownership of industrial real estate is being consolidated in the hands of increasingly fewer buyers, many of them now from outside the U.S., JLL said.

The projected spring 2016 launch of the expanded Panama Canal, which will accommodate ships up to three times the canal's current capacity of about 4,500 twenty-foot equivalent unit (TEU) containers, is expected to influence long-term changes in global supply chain dynamics, JLL said. Ports in the U.S. East and Gulf coasts have invested in their infrastructures to support what they hope to be increased cargo throughput through the widened and deepened Canal, which links the Pacific and Atlantic oceans.

"Logistics companies will favor ports with intermodal options to meet flexibility, cost, and service requirements to bring products in by ship and transfer to rail or truck to their final destinations," said Craig Meyer, president, industrial brokerage for JLL Americas.

Industrial demand will also be propelled by the growth of "urban logistics" centers, as retailers position more of their fulfillment space in urban areas—despite higher rents—to be closer to end consumers who demand even faster fulfillment, JLL said.

"In 2016, companies must calculate whether the high cost of instant gratification translates into higher sales and profitability," said Meyer. "More than one large retailer has paid higher "office-level" rents to create a network of urban warehouse/retail centers with proximity to consumers and hubs for FedEx, UPS, and USPS."

Meyer continued, "as e-commerce volume is expected to more than double, companies will need to build new efficient warehouses and expand their industrial footprint deeper into urban locations in order to support customer demand for one-day or same-day deliveries."