The industrial real estate market is going to be one of the most competitive sectors going into 2014 and beyond, market experts say, as vacancy rates drop and rents increase.
The larger national real estate recovery is on the comeback, and industrial is among one of the biggest winners, according to Integra Realty Resources Inc. (IRR), the largest independent commercial real estate valuation and consulting firm in North America.
“The industrial property sector continued to build momentum throughout 2013,” IRR reported in its Viewpoint 2014 report. “Capitalization rates in the sector continued to compress, while property fundamentals continued to improve. These trends have driven developers to re-enter the industrial sector, as 14 markets were observed to be in the expansion phase of the market cycle, compared with only two in 2012.”
The building of warehouse space increased by 27 percent by year-end 2013 from the previous year, second only to hotel construction in the commercial building area, which saw a 28 percent increase, according to McGraw Hill Research & Analytics.
Another bright spot in 2014 will be the increased amount of speculative construction in the industrial and distribution sectors. HSA Commercial in Chicago worked on three industrial spec buildings in 2013. Others are expected to follow suit.
“Institutional investors have started to take an active interest in industrial spec development since they are realizing the risk-adjusted rate of return is more compelling than competing aggressively for fully-stabilized real estate assets,” said Bob Smietana, vice chairman and CEO of HSA Commercial.
“With an infusion of new capital and banks willing to lend to well-capitalized sponsors, developers will continue to build spec projects in core markets like Chicago where vacancy rates below 5 percent suggest there is still plenty of unmet demand.”
In addition to Chicago, other top markets for industrial real estate growth include Miami, Houston, Seattle, Los Angeles and Dallas. Multiple reports put these cities in the top of their lists because they are already worldwide distribution centers with strong local economies. Industrial vacancy rates are expected to decline about 6 percent from 9.2 percent to 8.6 percent by the end of 2014, according to the National Association of Realtors.
Currently, the areas of the country with the lowest vacancy rates are Orange County, Calif., at 3.9 percent; Los Angeles at 4 percent; Miami at 6 percent; and Seattle at 6.3 percent. Net absorption for 2013 was about 97 million square feet, with more than 104 million square feet expected to be absorbed in 2014.
Rent of industrial real estate is expected to increase about 2.5 percent in 2014, according to the NAR.
The past year was a strong one for industrial markets, according to Frederick Liesveld of the Detroit office of Newmark Grubb Knight Frank, one of the largest real estate service firms in the world.
Metro Detroit is an area of interest because it is home to much of the automotive-manufacturing industry with General Motors Corp., Ford Motor Co. and Chrysler all headquartered there.
The continued strength of the automotive industry and the improved local economy has put the industrial real estate market into high drive, Liesveld and his team said. A considerable amount of absorption came from user sales as companies take advantage of current prices as values rise, Liesveld added.