NET ABSORPTION BALANCES, ACTIVITY CONTINUES
Last year during the second quarter, the market saw negative absorption and ended a 14-quarter streak of positive absorption. Net absorption fell into negative territory once again during Q2 2018. However, activity remained healthy. The quarter registered seven new leases, a renewal, and a user sale. Q2 2018 closed with 500,000 sq. ft. of activity, quadrupling over Q1 2018 and doubling over Q2 2017. In addition, a 334,000 sq. ft. deal completed during the quarter is one of the largest leases of an existing property in the McAllen market, only 20,000 sq. ft. shy of the Q3 2014 cycle high.
VACANCY REMAINS LOW, DEMAND ABOVE AVERAGE
The market-wide vacancy rate increased from the record low of 3.0% in Q1 2018 to 3.5% but stayed well below the historical average of 9.6% and fell by 180 basis points (bps) since Q2 2017. Class A and B vacancy also declined year-over-year by 190 bps and 380 bps, respectively.
CBRE Research tracks user demand for space in the McAllen Industrial Market, which declined compared to Q1 2018 but remained above the 15- quarter trailing average. Demand, like market activity, continues to be driven by the transportation/distribution-logistics-3PL sector which accounted for about 20% of total space requirements in Q2 2018.
NEW PRODUCT A FACTOR IN CLASS A RENT GROWTH
Together with persistently low vacancy rates and strong demand, new speculative (spec) projects pushed Class A asking rents up from $4.57 per sq. ft. in Q1 2018 to $4.78 per sq. ft. The majority of this increase can be traced to the delivery of a mostly vacant 50,000 sq. ft. spec project which has the highest asking rent of all available Class A products (excluding cold storage). Two additional, and still available, Class A spec projects were delivered in late 2017 and have asking rents above the market-wide and Class A averages.