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The year of the distribution center

Distribution centers (image)

Four reasons 2014 will be “The year of the distribution center"

Industrial markets nationwide have been recovering for almost four full years, with 15 consecutive quarters of positive net absorption. Last year marked a five-year net absorption high with 168 million square feet, and current forecasts suggest it could top 180 million square feet in 2014.

Here are four trends driving this momentum:

1. Good things come in fours:

  1. Demand is red hot in the “big logistics corridors” such as the Inland Empire, Central Pennsylvania and Dallas, since (while being transshipment markets with robust infrastructure and access to the nation’s population centers) they also offer development sites to accommodate new construction. These markets will be on the high-end of rent gains.

  2. “Gateway centers” including Los Angeles and New Jersey (built-out port markets that are home to mega population centers), will have significant rent upticks in quality B-inventory.

  3. “Secondary markets” such as Indianapolis and Phoenix (evolving auxiliary hubs) will post Class A gains that trail the logistics corridors.

  4. “Destination cities” like Seattle and Miami (markets with industrial inventory, but not as prominent as the other categories) will, based on a given’s market maturity, have varying rent gains.

2. Build-to-suits are the new spec: 
Half of U.S. construction commenced work with preleases in place during 2013. Underwriting criteria for big box space made true speculative construction difficult and many developers sought pre-commitments prior to groundbreaking of ‘inventory’ buildings. This means today’s build-to-suits are less about special purpose buildings, or design-build-projects, but are really about kicking off semi-spec buildings.

3. Focus on rail:
With the cost of trucking on the rise, developers and investors are focusing on markets with solid intermodal infrastructure in places such as Dallas, Columbus and Memphis. For the seaport-immediate markets of Oakland and Miami there is a push to enhance on- and near-dock rail capabilities; Miami's new rail system, for example, will give the port access to 74 percent of the U.S. population.

4. Growth driven by ‘clicks’ surpassing ‘bricks’: 
Staggeringly, 40 percent of ‘big-box’ industrial requirements are correlated to e-commerce; a sector growing globally by 20 percent each year. As retailers develop new real estate models to support their omni-channel logistics models, they are looking at six primary types of warehouse space, ranging from mega-distribution centers to smaller delivery centers in urban areas.  In 2014, we expect to see demand for delivery (‘urban logistics’) centers to support same-day package delivery.

We anticipate the overall national vacancy rate will settle at a cyclical low of 7.5 percent in 2014. Total U.S. rent growth could exceed 3.5 percent in 2014, but certain markets will experience gains as high as 5.0 percent or more.


The year of the distribution center

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Four reasons 2014 will be "The year of the distribution center" 

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