JLL calls 2017 a ‘banner year’ for U.S. industrial real estate market activity

The fourth quarter of 2017 and the calendar year over all were very solid for United States industrial real estate activity, according to research recently issued by Chicago-based industrial real estate firm JLL.

Two of the biggest takeaways of the research, entitled “First Look at Industrial,” focused on the U.S. industrial vacancy rate and rents.

For the former, JLL found that U.S. industrial vacancy rates for warehouses and distribution centers fell to a new all-time low at 5.0% in the fourth quarter, which dropped from the third quarter’s rate of 5.2%. What’s more, JLL said that in certain logistics markets, including Los Angeles, the East Bay (Orange County, CA), and Salt Lake City, vacancy rates were at a sub 3.0% rate.

And for the latter, average rents for the fourth quarter hit $5.50 per square-foot, which was up from $5.40 per square-foot for the third quarter. On an annual basis, rents in the fourth quarter of 2017 was up 5.4%, which came in lower than the 8% increase from the fourth quarter of 2015 to the fourth quarter of 2016.

Another relevant finding centered on a trend showing a significant increase in demand for what JLL called “mid-sized industrial product.” This is based on shippers vetting smaller warehouse locations in order to be closer to customers in more cities to augment last-mile logistics delivery strategies. These facilities, said, JLL, are warehouses in the 100K-250K square-foot and the 250K-500K square-foot categories.

“This is a result of a shift in demand in activity that we saw in the fourth quarter,” said Mehtab Randhawa, Vice President and Associate Director for the Industrial property sector for JLL’s Americas Region. “It is a shift in demand from higher leasing activity that we saw in the fourth quarter for the mid-sized industrial product. We have been gradually seeing this shift quarter-over-quarter through the course of 2017. But when we compared our final Q4 2016 with Q4 2017, this trend really stood out to us in terms of good absorption and where the demand was really coming from. We saw demand coming in from big box tenants that had, in the past, been looking at space in the 500K-750K square-foot and 750-1 million square-foot range.”

She explained that the same set of tenants is now looking at smaller box spaces and closer to population centers, which is key for last mile logistics activity and comes with shorter delivery times as well. And she added that JLL believes this is a trend that is going to continue through the course of 2018, with many tenants looking for spaces within that timeframe.

Along with big box retailers a fair amount of demand for these types of spaces is coming from logistics-related tenants like 3PLs and related service providers looking to get closer into urban clusters, noted Gillam Campbell, JLL Research Manager for the Industrial property sector. Other types of tenants, she added, are consumer durables companies.

Aaron Ahlburn, Senior Vice President and Director of Research for the Industrial property sector for JLL’s Americas region, explained that another customer category for these spaces includes what he called delivery in order facilitation type companies that focused on services such as outsourced delivery operations, as well as white glove and last mile operations, too.

While growth is expected in 2018, it also creates a situation where available space becomes harder to secure for tenants, which can be viewed as the byproduct of a strong market with healthy fundamentals.

“With the pure economics of it, you continue to have healthy demand and rather limited supply,” said Ahlburn. “You will continue to see upward pressure on rent, which is a function of limited available space. There is also going to be some aggressive development in markets where it is needed and there is the ability to build and create new supply. Some of it depends on the requirements that are still out in the market. We are hearing from our local markets that there is a healthy pipeline of demand for the coming year. I think this lends credence to a continued healthy market, and I think we will see both a mix of build-to-suit construction, as well as continued speculative development, too.”