Supply Chains Push the Real Estate Rebound

Oct. 15, 2010
The new real estate mantra is: logistics, logistics, logistics.

There's positive movement in the North American industrial real estate sector, particularly for high-end logistics space, but mixed economic indicators could spell a slow recovery. According to a recent study from professional services firm Jones Lang LaSalle, national average vacancy rates have tumbled 20 basis points for the first time in almost two years from 10.6% in the first quarter to 10.4% in the second quarter. Leasing activity across many markets is up, but the sector is still vulnerable to mixed economic indicators that could make sustained recovery slow or sporadic at best (see chart).

"While we can report some overall positive news for the sector, we are still very much at the mercy of this precarious economy," explains Craig Meyer, managing director and leader of Jones Lang LaSalle's Logistics and Industrial Services group. "Declining consumer confidence, the fading impact of the federal stimulus support and worldwide economic volatility are forcing many industrial landlords, tenants and investors to look back over their shoulders in fear of a double-dip recession."

While labor market pressures and slow job growth are dragging on the economy and keeping pressure on consumer spending, there have been positive indicators to offset some of the down side. Increasing corporate profits have renewed long-term optimism, which has in turn spurred a significant amount of second-quarter industrial leasing activity. This was fueled by large occupiers executing significant renewal, consolidation or relocation transactions helping to temper overall vacancy figures. However, sustained deal volumes will be essential for a stronger turnaround in current trends.

"With the rise in Corporate America's second-quarter profits and a need to restock inventories that were running at 50-year lows, a number of large occupiers have strategically captured high-quality logistics space at cyclically low rates," Meyer observes. There are only 11.3 million square feet of new construction in the pipeline, he reports, and 83% of that is pre-leased. "With such low levels of new construction planned in the foreseeable future, we expect to see an increase in build-to-suit activity," he predicts.

The study, which tracks 38 key industrial markets in the U.S., found that average net absorption is at 11.1 million square feet for the quarter, but remains negative at 7.4 million square feet so far this year. Markets that also act as supply chains are performing well, such as New Jersey, where vacancy declined 60 basis points, joining California's Inland Empire with 4 million square feet of positive net absorption year to date, along with Dallas posting 2.4 million square feet of positive gains; both markets are trending toward organic growth.

Demand for high-end, prime logistics space is topping the general market and has given a boost to Midwest markets such as Memphis, Columbus (Ohio) and Dallas/Fort Worth, in addition to the Inland Empire, as well as key distributions markets in the Northeast such as central New Jersey, Philadelphia and Harrisburg.

See Also:
• How to Heal a Broken Supplier Relationship
• The Distribution Trap

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