Expect Sticker Shock on Lease Renewals, JLL Says

In what remains a lukewarm overall US economy, with Q1 real GDP growth of just 1.2%, the market for industrial space generally and warehouse and distribution space specifically remains red hot, sending lease rates still higher.

That according to the new Industrial Outlook report for Q1 from real estate firm JLL (formerly Jones Lange LaSalle), which finds overall US vacancies levels fell to 5.3% - the lowest level in 17 years - as efulfillment continues to drive demand for distribution space.

Supply Chain Digest Says... There are signs that the market may be peaking in many areas - though we've heard this before in recent years without that peak actually being reached. What do you say? Click here to send us your comments Click here to see reader feedback

"The resounding strength of industrial tenant demand coupled with the tightest fundamentals yet experienced in the sector continued to drive the sixth consecutive year of rent growth," the JLL report said.

US asking rents increased by 70 basis points (0.7%) quarter-over-quarter, closing at $5.25 per square foot. JLL says the top four markets with the highest year-over-year rent growth in Q1 were Northern New Jersey, San Francisco mid-Peninsula, Seattle and the Inland Empire. All four markets boasted annualized growth rates of over 10%.

Simultaneously, vacancy rates hit new lows, with all four of those markets reporting rates under 4%. New Jersey especially is seeing prices soaring, with rates in Northern and Central New Jersey up 18.5% and 10.8%, respectively over the past year.

And for companies looking to renew a lease almost everywhere, get ready for the landlord coming back with much higher prices.

"For cost-sensitive occupiers that need larger warehouse spaces, limited options of existing spaces are available on the market and they are likely to experience sticker-shock when renewing their rents," JLL says.

Vacancy rates fell in nearly three-quarters of US markets. This despite a steady flow of new construction in most markets. JLL says the areas with the least vacant space continue to be in the California markets of Los Angeles, East Bay and Orange County, all reporting vacancy of under 2%.

JLL says total "net absorption" of warehouse space - a measure of how much square footage is taken by companies versus abandoned space - continues to outpace new deliveries. While declining in Q1 versus the previous quarter, absorption saw an11.9% year-over-year increase. Philadelphia alone absorbed nearly 8.2 million square feet in Q1, followed by Dallas (6.5 million square feet) and Atlanta (5.7 million) as the fastest growing markets.

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With that kind of demand, construction continues apace, with much of it "speculative," where the builder begins constructing space without a firm client. JLL estimates that based on the existing development pipeline, an amazing 247.2 million square feet will likely be delivered to the US market in 2017, the equivalent of 247 one million square foot facilities.

JLL notes that while the speculative pipeline remains robust, owner-user (a company constructing its own facility) and built-to-suit (BTS) projects are also strong, combined contributing 28% of new groundbreakings.

Pre-leasing rates for speculatively built buildings increased by 3.2 percentage points to nearly 27%, a sign of continued healthy demand from tenants. However that was down from the very high level of 43.2% pre-leased seen in Q3 2016.

"As companies continue to gobble up space, competition for the most optimal space remains fierce, and the development market moves ever forward," the report says.

Some Relief for Distributors May be in Sight

There are signs that the market may be peaking in many areas - though we've heard this before in recent years without that peak actually being reached.

As seen JLL's "industrial clock" graphic published below, a number of US market are said to be in the "peak" quadrant, headed at some point for a "falling phase," but it may take awhile to get there.
JLL expects 88% of the markets it tracks to continue to be favorable to the landlords across the country in 2017. As can be seen from the graphic, JLL sees no markets as currently being in the "falling" or "bottoming" phase of the cycle.

JLL Industrial Space Clock for Q1 2017

All that said, rates vary dramatically by different markets. For example, though the Atlanta market for space remains very hot, an ample supply of land means rental rates are still just $3.79 per square foot. Rates are at just $4.32 in the also red hot Dallas region.

Compare that to the rates in the East Bay area of San Francisco ($7.99), Los Angles ($9.12), Orange County, CA ($9.24), parts of San Francisco proper ($13.91), and Seattle ($9.70).

The full report can be found here: JLL Q1 2017 Market Outlook

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