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The two sides of rent growth

The two sides of rent growth: One man’s ceiling is another man’s floor

The old adage that “one man’s ceiling is another man’s floor” is a good way to describe industrial rent growth in 2014. Vacancies in many of the big logistics markets sit well below the national average, and new construction is just beginning to catch-up with demand. Asking warehouse rents, on average, increased by 3.6 percent during the past 12 months, while effectives had far more substantial upticks. Even in some secondary markets, whose vacancies generally exceed the national average, effective rents posted gains.

With annual net absorption up 17.0 percent and the total U.S. vacancy rate nearing a 7.5 percent cyclical low, we are no doubt pushing towards a landlord’s market. The greatest rent increases are occurring in the high-octane logistics corridors such as the Inland Empire, New Jersey and, surprisingly, Dallas. In Dallas, absorption gains are near all-time highs (17.2 million square feet in 2013), and year-over-year warehouse rent growth could exceed 5.0 percent in 2014.

Implications for Landlords

Not surprisingly, industrial landlords will enjoy continued rent growth in 2014 based on intensifying market fundamentals for the most part and minimal new deliveries. From 2010 to 2012, only 107 million square feet of inventory was introduced – a record-setting, sixty year low. This will change over time as new construction deliveries increase, but only a handful of markets had more speculative development than build-to-suit activity by year-end 2013 such as the Inland Empire, Dallas and Houston. Striking a balance with new supply-to-be and active tenant requirements will be crucial to maintain future rent upticks. Across the country, speculative groundbreakings will prove measured (with stringent underwriting by lenders keeping the market in check).

Half of 2013’s construction stemmed from pre-committals prior to groundbreakings, and this will continue. Current build-to-suits are less about design-build projects, and more about kicking off speculative development.

The bottom line is that industrial property owners will see increasing rents from tightening market fundamentals. It will be broad across many markets since new construction is still somewhat in-check. This trend will not let-up anytime soon.

Implications for Tenants

For our occupier clients, time is no longer their ally, and we are advising them to lock-in rates before rent increases occur across all size segments and regions. There is still, however, softness in the sub-250,000-square-foot category. Being decisive now to secure quality space is recommended, since supply-on-hand will only narrow. In fact, many of our clients are willing to focus on a single property rather than engage in a protracted RFP process because they feel the more time they take the more likely an opportunity will slip by or rates will increase. For tenants with larger requirements, confronted with minimal existing space options, build-to-suits present the only alternative.

Rents, in the end, will grow faster for new product versus existing inventory. While Class B space will post gains, most of the upticks will occur in the nation’s gateway corridors.

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The two sides of rent growth

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The two sides of rent growth: One man’s ceiling is another man’s floor

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