Square footage, equipment, and access to the right location are crucial aspects to a successful supply chain. However, finding the right location is becoming harder than ever before because real estate capacity is tightening at record levels. In Q4 of 2015 industrial real estate vacancy reached a 15-year low5. Factors that have influenced the capacity tightening over the past several years include the economy, consumer spending, market environment, and supply of space.
Economic Factors Infiltrate the Market
The overall slowing of the global economy has led to low commodity prices and a strong U.S. dollar. In response, U.S. real estate is in demand for domestic and international businesses. The benefits of renting distribution centers in the U.S. are attractive, however, the Federal Reserve has started their policy of raising interest rates, which may affect financing. It most likely won’t directly affect the industrial real estate demand because regardless of interest rates, shippers still need space.
Consumers Continue Spending
Wage growth is accelerating and unemployment is declining, making a winning combination to boost spending. With more disposable income, auto, home, and retail – especially ecommerce – sales are all on the rise. Ecommerce is particularly relevant to real estate because shippers want to better serve their customers in a world where consumer expectations of shipping time is continuously tightening. Many shippers are choosing to implement networks of regional distribution centers in urban hubs to be closer to their customers and reduce the time it takes to get products to them.
The Market Responds
Constraints on supply and an increase in demand will continue to reflect on rent levels that remain on the rise. You’ll see a higher variance in rental rates in areas considered main distribution hubs, like the Lehigh Valley in Pennsylvania. Average rental rate grew about 10-13% in certain areas. Tenants are also taking the initiative to execute leases far in advance of their previous lease expiring6.
Supply Shifts Across the Country
It’s not just new tenants looking for space that is driving demand, but also current tenants looking for more square footage to expand. The markets in highest demand are dispersed across the country and include Chicago, Dallas, New Jersey, Southern California, and the Lehigh Valley among others7. This indicates that shippers are choosing to expand their networks and have opportunities to increase productivity across the country.
All in all, leasing demand, rent growth, and construction remain strong within the industrial real estate market. As for now we predict the trend of tightened capacity to continue through 2016.