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Focus: Distribution/Materials Handling

Feature Article from Our Distribution and Materials Handling Subject Area - See All

From SCDigest's On-Target E-Magazine

Nov. 23, 2011

Logistics News: Slowly, Warehouse Space Overcapacity is Turning, and Rates Heading Upward

New Report from Grubb & Ellis Says Empty Space from Recession Nearly Absorbed; A Return to Spec Building by Developers at Last?


Cliff Holste, Materials Handling Editor

The financial crisis and recession delivered a powerful blow to distribution center developers and owners, as demand plummeted and many companies consolidated existing facilities into fewer buildings.

Developers building on "spec" came to a literal halt, and rates naturally fell sharply, making it a buyer's market for companies looking for new space or to renegotiate existing leases.

SCDigest Says:

"Speculative new construction will be the story of 2012," the report says, after two years of literally no new spec construction in the US.
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But despite the wobbly economic recovery in the US ever since, the market is quietly recovering, and will soon have absorbed all of the millions of square feet of space left idle during the recession, a new market analysis from real estate company Grubb & Ellis recently found.

It says that in total, 153 million square feet was vacated over a six-quarter period starting in late 2008, of which 132 million has been reabsorbed over the subsequent six quarters. That includes general industrial and "incubator" type space, in addition to DCs and warehouse space, which represents the strong majority of the total.

Grubb & Ellis notes that "Given the severity of the decline, the current recovery is progressing slightly ahead of the one that followed the 2001 recession."

The report states that the remaining unabsorbed space from the start of the recession should be absorbed by the end of Q4.

Given that rebalancing of supply and demand, it should be no surprise that rates appear to be heading up. The report says that following three consecutive quarters of flat readings, overall asking net rents increased an annualized 0.6% during the quarter. This means that "The bottom has been formed and rent increases will accelerate in 2012," Grub b & Ellis says.

Even though new supply of space increased by 53% from the second quarter, that 5.3 million square feet of total national deliveries ranks as the fifth lowest quarterly total on record.

The report says demand is strong in most markets, with Q3 net absorption positive (meaning more space was leased/rented than delivered to the market) in 34 of the 49 metro regions Grubb & Ellis tracks.

The report says that with the exception of Atlanta, where demand slowed markedly in Q3, all other national distribution markets saw strong demand, especially for large blocks of distribution space. Chicago led the way with 2.5 million square feet absorbed, followed by Dallas/Fort Worth with 2.3 million square feet and Northern/Central New Jersey with 2 million square feet. Phoenix, which historically acted as a local distribution market, has been attracting retailers from California, resulting in quarterly net absorption of 1.7 million square feet.

Interestingly, the report says that demand for space and upward rent/lease price pressures are greatest at the largest end of the space segment . As seen in the chart below, DC space over 750,000 square feet saw by far the largest increase in demand, growing at about a 20% rate, while demand for all other space categories was in the low single digits or slightly negative during the period. In practice, this means that of the relatively few new DCs that were built on contract, the vast majority were for very large facilities.

Market Demand by Facility Size in Q3


Source: Grubb & Ellis


(Distribution/Materials Handling Story Continues Below )


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The vacancy picture still varies significantly across markets, as shown in the graphic below. Despite a weak year for imports and a struggling California economy, the Los Angeles area still has very tight conditions, with vacancy rates of just 2.9%, followed by Orange County at 5.3%.


Vacancy Rates by Major Market



Source: Grubb & Ellis


In general, vacancy rates have been steadily declining over the past year and a half.


The Return at Last of Spec Construction

Given the supply -demand picture, developers totally abandoned spec building in construction starting in 2009, with new construction limited to buildings under contract.

But, says Grubb & Ellis, that is starting to change after two years of drought.

"Speculative new construction will be the story of 2012," the report says. "While in 2011 the news was the commencement of construction of the first, large speculative building since the beginning of the recession, the focus of 2012 will shift to the depth and breadth of the construction market."

It says there are 16 markets where speculative construction is already occurring, or is to commence in the immediate future.

Currently, there is 23.3 million square feet of under construction, of which nearly 10 million square feet is speculative.

The report, however, says that with the economy still this soft, the new construction could send the market dynamics in the opposite direction again if demand slackens, which is still a real concern for real estate firms.

Notable new DC projects in the quarter included:

• A built-to-suit for Skechers USA in the Inland Empire market , was the largest completion in the US at 1.8 million square feet. The buildings will serve as a national distribution center, reaching customers across the U.S. and Canada.

• A Clorox built-to-suit in the Chicago market totaling 1.35 million square feet was completed during the third quarter. The building is not occupied yet, but will be soon when it moves operations Minooka to University Park at a net gain of 500,000 square feet.

• The third largest completion of the quarter took place in Atlanta, where Sany America moved into its built-to-suit. The facility is a 409,000-squarefoot corporate headquarters and /manufacturing facility.

Do these DC market statistics sync with what you are seeing in the market? Should companies try to lock in space/rates now with conditions tightening? Are developers smart to get back into spec building now? Let us know your thoughts at the Feedback area below.


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