Consistent net absorption gains in gateway markets, the subsequent spillover effect to secondary markets, a dwindling supply of larger blocks of Class A space and build-to-suit activity has captured the attention of speculative developers.
Preliminary numbers for the third quarter of 2013 have under construction activity at 96.7 million square feet; nearly half of this is speculative product with an average building size of 342,000 square feet*. By geography, the West (San Diego to Seattle) has the highest speculative to total construction ratio with 66 percent, followed by Central (Phoenix to Pittsburgh) with 47 percent and the East (Miami to Boston) with 36 percent. In all, 40 U.S. markets have speculative projects underway.
A West-Coast-emphasis can be traced to the Inland Empire. The market, adjacent to Los Angeles (which houses the nation’s busiest seaport complex) bottomed out in late 2009, experienced progressive net absorption gains and broke ground on a 616,852-square-foot facility during the first quarter of 2011. The building—the first speculative project in the nation after the recession hit—was soon preleased by the IDS Group, and this sparked a wave of local speculative development, which continues today. E-commerce tenants are active, and a handful have committed to this construction subtype. Flash forward to 2012 and whispers of speculative groundbreakings were heard in major logistics corridors such as Dallas/Fort Worth, Chicago, New Jersey and Atlanta.
All now have projects underway and tenants’ preference for modern warehouse space, which outweighs supply thresholds, from a national perspective, has ushered in new development in secondary markets. A tagline could easily read: “It all started in the West…”
“…it may end in the West” is today’s concern. The Inland Empire has 8.1 million square feet of speculative product underway and local user requirements for mega box space (500,000 to 749,999 square feet) are fewer now than last year; a supply-demand imbalance that may have numerous consequences for this size segment, including flat rental rates, a construction-pause and a jump in the market wide vacancy.
The lessons developers learned from over-building during the last cycle’s peak linger, meaning that although U.S. speculative development is increasing it appears to be at a measured pace. Groundbreakings will increase in Central and the East however completions are not anticipated to mirror 2008; at least, not anytime soon.
National tenant requirements are flat compared to this time last year, though the number of requirements is up—a substantial injection of new inventory may prove too much if developers become too aggressive and are not sensitive to where U.S. demand is concentrated.
Lifting with a spotter is key, and Jones Lang LaSalle has the research capabilities to help developers manage the weight of informed business decisions.
* the average is based on facilities in excess of 100,000 square feet.
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96.7M under construction - It all started in the West.
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