Dear Client,

We wanted to make sure you received the latest CBRE Industrial Report.  

Summary

The story is positive for most industrial markets across the Americas. Despite political concerns in the United States and uncertainty around interest rates, the leasing and capital markets environments have continued to push in a positive direction. Both occupiers and institutional owners are cautiously optimistic going into the close of 2013.

National Tenant/User Perspectives

• Tightening in some markets continues resulting in bidding wars over available spaces.
• With speculation and uncertainty around interest rate increases, users are less optimistic about purchasing facilities and are thus turning back to leasing space.
• Retail sales figures have remained strong, especially within the e-commerce sector, supporting expenditures of additional distribution/infrastructure.
• Users continue to evaluate all aspects of their supply chain to ensure the most efficient delivery model is being utilized.
• In preparation for holiday sales, users are now evaluating flexible options to support increased seasonal demand.

National Landlord/Owner Perspectives

• Spec construction is needed in several space constrained markets.
• Report cards are coming back from early 2013 decisions to “hold firm” on lease rates – and most owners are pleased with the results.
• Landlords are closely tracking the housing market in the U.S.
• Going into the 2014 budget season, institutional ownership is evaluating recent market momentum with the knowledge that all markets can turn on a dime.
• Local owners are seeing increased market momentum driving deals to both institutional landlords as well as local owners when supply tightens.

Capital Markets Perspectives

• The market fundamentals continue to support aggressive underwriting for industrial real estate portfolios. Acquisition officers believe in rental rate growth given the tremendous imbalance between national absorption and new construction.
• There is a 4 to 1 imbalance between investor demand and offerings on the market. This imbalance is creating frenzied competition between investors for the Class A offerings in primary markets.
• The investor profile has expanded beyond the traditional investor base to include foreign investors and major private equity firms. Given the nominal price PSF of industrial real estate versus other asset classes, it is difficult for investors to aggregate a critical mass of industrial real estate holdings. As a result, the portfolio premium has returned for large scale multi-city portfolios.
• The recent increase in the U.S. Treasury rate has not directly impacted cap rates for industrial real estate. Investors look to grow NOI through rental rate and absorption with the expectation that increased NOI’s will offset increased debt service. And the only exception might be long term single tenant net lease properties where there is a correlation and sensitivity to the 10 year Treasury rate.
• Most investor interest remains focused on the primary markets and major population centers, but as acquisition officers become more familiar with the major supply chain markets, they will underwrite and invest in those markets as well although there is a cap rate spread to the primary markets.
• Investors are interested in core, core-plus, and value add offerings. Value add definition is broadened to include vintage rent rolls in the 2008-2012 time horizon when lease rates were well below the historical average lease rate.

Regional Perspectives

Northeastern United States

• Norfolk’s velocity of small 25,000- 50,000 sq. ft. spaces surges in past three months.
• Data centers, service centers and residential are key sources of high absorption in Northern Virginia.
• Washington DC has first build-to-suit building under construction since 2008.
• Northern New Jersey has eight mid-sized buildings and only one that fits users’ demand for 500,000+ sq. ft.
• High demand and low supply of 600,000+ sq. ft. spaces in Southern New Jersey justifies build-to-suits coming to market.
• New Haven witnessing an increase in renewals.
• First spec building announced in Buffalo, while build-to-suits remain active.
• Boston rents now at $6.00+ psf even though demand near city is low due to traffic and building age.

Southeastern United States

• Users from region are attracted to Greenville’s S.C. Inland Port.
• Space is limited in Virginia Beach, with most 250,000+ sq. ft. buildings occupied until 2014.
• Automotive, logistics, food and residential related users have strong presence in Atlanta’s market and build-to-suits represent 50% of total 7.1 M sq. ft. absorption.
• Limited inventory in Ft. Lauderdale is increasing sale prices.
• Jacksonville experiencing an increase in sales, as expectations for 2014 include build-to-suit development and rent growth.
• 730,000 sq. ft. of spec buildings delivered to Miami market.
• Pharmaceuticals and automotive industry are driving activity in Memphis.

Central United States

• Large space users in Minneapolis are active.
• Data centers and local users are driving strong activity in Omaha.
• Tulsa’s users demand crane buildings as bulk supply decreases.
• Capital market activity in St. Louis increased dramatically with only three to five Class A alternatives remaining.
• Cincinnati activity remains high with five deals over 120,000 sq. ft.
• Auto suppliers and medical device manufacturers are active in Detroit as vacancy rates reach below 5% in some submarkets.
• Rents for Class B and C product are increasing in Chicago submarkets.
• 10 M sq. ft. of current construction in Dallas is made up built-to-suits and spec, with more spec in pipeline.

Western United States

• Inland Empire seeing large user requirements for 400,000+ sq. ft. and for investment sale.
• Free rent and TIs are common to stimulate transactions in the Mid Counties.
• The heavy user buyer activity in South Bay is driven by users below 200,000 sq. ft.
• LA North seeing substantial lease rate increase.
• Phoenix witnessing high activity of small-space requirements.
• Northern Reno’s first spec development is an e-commerce building, helping to stabilize the lacking Class A inventory.
• Denver’s market remains robust as owners are able to pre-lease spec space.
• Stockton’s market tightening as vacancy rates drop and still no spec development.

Canada

• Toronto continues to see stable growth and consistent activity. Inventory levels remain low making it difficult for users to secure their “ideal” premises.
• Greater Montreal continues to experienced an increase in availability primarily due to more available space in North Shore and Laval. Calgary’s leasing activity remains slow but there are active requirements that exist in the market.
• High construction costs and limited industrial development  land hinder new inventory in Ottawa.
• Limited quality available space in Vancouver’s metro market has forced further cap rate compression for Class A and B industrial properties.
• A large share of Halifax’s overall positive absorption consists of newly constructed and occupied space.
• Small scale in-fill industrial development is starting in SW Winnipeg with net rents needing to be above $10 psf to justify construction costs.
• Edmonton experienced a significant absorption of product in the Northwest and Southside markets.

Mexico

• Mexican annual industrial output fell 0.5% in July 2013, pushed down by housing construction figures (-6.3% annual).  This, despite the fact that manufacturing production grew at a 2.8% annually in July.
• Mexico’s automobile production expanded with an annual growth of 4.4% for the Jan-Aug 2013 period; nearly 2 M units were produced.
• Currently, 89 of the world’s top 100 auto parts makers have production in the country. The companies are concentrated in five Mexican states, reducing transportation costs.
• Due to higher demand, growing markets such as Northern Mexico City, Monterrey, Guadalajara and Bajio have an increasing number of speculative projects.
• Mexico City is seeing new supply entering the market with 650,000 sq. ft. and more than 4.3 M sq. ft. of projects under construction. Thus, vacancy rate has increased and prices have decreased.
• The Bajio region’s activity continues growing. In Q3 2013 its inventory reached 48.9 M sq. ft. and the 7.0% vacancy rate was up from 6.5%. Gross absorption grew 5.5% annually.
• Guanajuato is expecting 2013 real estate activity to be higher than 2012 due to YTD positive absorption reaching 1.7 M sq. ft.; this is over 51.6% of last year’s absorption.
• The Monterrey market is gaining dynamism with a Q3 2013 increase of 1.3 M sq. ft. in inventory; this is 68.5 M sq. ft., representing the largest industrial market in Mexico; and a vacancy rate of 9.8% in the Q3 2013 versus a 9.2% in the previous quarter.
• Strong industrial demand from automotive sector is encouraging real estate activity in Saltillo’s industrial market showing important levels of absorption with 1.8 M sq. ft. in the first nine months of 2013 vs. 1.4 M sq. ft. in the same period last year, meaning a 31.5% annual increase.

Click here to download this report - (Americas Industrial Trends Report_Q4 2013.pdf)

Should you have any questions, or would like to discuss, please contact me at your convenience.

Thank you.

William T. O'Connor

Senior Vice President

CBRE, Inc.

PCG Detroit Capital Markets
248.351.2045

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PCG Detroit Capital Markets

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