Ecommerce and last mile logistics tenants continue to fuel a massive industrial space expansion in the U.S., with 272 million square feet (msf) of construction completed across 46 markets during the last 12 months.
According to AvisonYoung’s Spring 2019 Global Industrial Market Report, there is another 274 msf in the pipeline, as developers seek to satisfy the demand for modern space with proximity to transportation networks and large population pools.
Dallas topped two key categories in the report, which analyzed activity from Q2 2018 through Q1 2019.
The venerable industrial market led the Top 5 lists for space under construction (30.9 msf) and absorption (23.4 msf). It ranked #2 for construction completions over the 12 month period, with 29.4 msf, behind Los Angeles, with 39.3 msf.
“Dallas-Fort Worth is one of the healthiest industrial markets in the country, with over 30 million square feet under construction, a consistently low vacancy rate, increasing rental rates, and stable investment activity,” said Mike McElwee, a principal in AvisonYoung’s Dallas office.
“This activity is the culmination of multiple years of significant business and population growth and the region’s comparatively lower cost of living and doing business.”
The industrial market in Dallas-Fort Worth also benefits from a centralized location and strong transportation and logistics infrastructure.
Among the companies committing to large blocks of space in the market recently are Home Depot, Ashley Furniture, and Living Spaces.
Home Depot has announced plans to open a multimillion-dollar distribution facility in the market.
Rounding out the top 5 markets for space under construction are Philadelphia (29.2 msf), Inland Empire (27 msf), Atlanta (22.7 msf), and Chicago (19.3 msf). There was also notable activity in Houston, which has 15.5 msf under construction.
At Q1 2019, only 99.8 msf - or 36.5% - of the 274 msf in the pipeline nationally has been preleased. The report showed U.S. overall vacancy rates remaining flat year-over-year at 5%.
All 46 markets monitored by Avison Young retained single-digit vacancy rates, with the highest being Phoenix at 6.9% and the lowest being Los Angeles with 2.2%. Dallas has a 6.8% vacancy rate, as all the new construction moves through the leasing cycle. Of the 30.9 msf under construction, 44.7% is preleased.
While Avison Young researchers predict that the new dramatic increase in supply may cause a rise in vacancy rates and a slowdown in absorption in some markets, they don’t anticipate a slowing in industrial markets in the near term.
“Dallas-Fort Worth has experienced an unprecedented construction cycle in recent years and the market has sustained strong absorption, unlike previous cycles that brought over-building and the strain that places on the market,” said McElwee.
“What’s been amazing about this cycle is that a significant amount of the new product coming out of the ground has been pre-leased, a sign of a healthy market. We are seeing an increase in speculative construction, but these projects prove to be in the right pockets in the market where space is needed.”
In an interview with Supply Chain Management Review, Cody Lerner of Avison Young noted that while Amazon clearly is a threat to small businesses in their ability to pay higher wages and drive down pricing by buying in bulk, they also see many small businesses benefiting from having Amazon in the market.
“Many businesses operate as distributors for Amazon, helping them extend their reach and make those same-day and next-day delivery thresholds, some of those businesses wouldn’t be in existence if it wasn’t for Amazon.”
According to Lerner, the impact of Amazon on small businesses is somewhat of “a mixed bag,” given all the variables and the competition in the market.
“From the real estate perspective, it’s often better for smaller businesses to avoid locating too close to an Amazon facility, as there is a concern that Amazon would draw away employees,” he said.
“They also are looking beyond Amazon to their distribution needs. It’s important to consider whether they need to be closer to the ports because of shipments coming off the ships, for example.”
He concluded by noting that there is “a huge rent escalation” on warehousing space near the ports and if businesses don’t need to be there, then coming farther into the Inland Empire would be much more beneficial to them.
Absorption has also been strong across many U.S. market. The top 5 U.S. markets for absorption over the past 12 months, ending with Q1 2019, include:
The report, which covers 64 industrial markets in seven countries across the globe, also noted this U.S. activity:
Download the Avison Young Global Industrial Market Report
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