Soaring demand for modern, bulk warehouse space stands to benefit the Philly industrial space market as well as other key distribution markets in the nation, the CoStar Group reports.
“Investor demand for warehouse and logistics properties is limited only by the current shortage of modern new buildings available to buy,” CoStar analysts said at the recent Fourth Quarter Industrial Real Estate Review and Outlook.
Noting that rental rates continue to rise, especially for new, high-quality logistics space, the analysts said buildings — including those in the market for industrial space in Philly — can be constructed and leased with good credit tenants potentially for the next decade.
“This,” said one analyst, “is as good a time in industrial real estate as you could possibly imagine.” “It’s a great time to own industrial real estate,” said another.
Despite the lack available properties, one analyst said, sales of institutional grade properties are the strongest ever in terms of sales volume and square footage traded.
Capitalization rates stood at a record low of under 6% for institutional properties, according to the analyst, and there have been reports of significantly lower cap rates for sales of big box warehouse leased to triple-net credit tenants in top markets.
With competition increasing to get into the industrial real estate market, including the Philadelphia industrial space market, investment sales in 2014 rose a substantial 8% in the industrial sector to $60 billion.
Despite the healthy investor interest in industrial real estate, such as industrial space in Philly, sales of industrial properties lagged behind multifamily, office and retail property sales, once again because of the lack of available properties to buy. Development of bulk warehouse space is on the rise, but is not yet equal to investor demand for the new modern facilities tenants want for progressively more sophisticated and high-tech logistics supply chains, according to CoStar.
A CoStar analysis compared inventory of newer logistics buildings (five years old or less) with all existing logistics buildings, finding that both the supply of newer buildings and the ratio of sales dropped notably since 2002. At that time, 32% of trades were for newer buildings, while today the percentage of trades in newer buildings is closer to 10%.
One analyst noted that the lack of new construction is holding back sales by as much as 10 percentage points and that existing building prices are being bid up because there are too few sellers.
Although industrial real estate generally underperforms in comparison to the more desirable commercial real estate sectors, the great demand for newer higher-functioning properties has pushed rents for industrial space up 4.5% in 2014, while the rental rate increase was 3.7% in the office space market, 3.2% in the apartment sector, and the 3% in retail space.
The 8.7% vacancy rate for logistics space in fourth quarter 2014 as compared to the 9.9% vacancy rate in 2007 at the height of the last real estate cycle, indicates a tightening of available space in the market. Absorption was 167 million square feet in 2014, slightly lighter than in 2013 the because of the lack of usable vacant space, an analyst noted.
Logistics construction rose 14% to 136 million square feet in 2014, but is still roughly 44 million square feet below its peak of 180 million square feet in the early 2000s.
Although the recovery in rents and property values for high quality logistics space is almost finished, the analysts said the light industrial property segment was just starting the expansion phase. There has been only minor new development of light industrial space, but that should change over the next several quarters, they said, calling that expectation “very promising” as it points to the strength of local economies.
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