Tuesday, December 31, 2013

Industrial Strength: Sector Making Significant Strides




Observations by Michael Bull, CCIM, Founder, Bull Realty Inc., Atlanta, GA


Michael Bull
With the housing market starting to pick back up and absorption on track to outpace last year, the industrial sector has continued its recovery, its sights set on a bright 2014.

That recovery was the focus of the most recent episode of the “Commercial Real Estate Show” radio program. My guests and I discussed the specific factors driving the recovery, such as the growth of e-commerce, as well as the return of new development.

Who’s Steering?

A steadily improving economy has led the industrial market to experience improving fundamentals for the last 13 quarters, said Rene Circ, director of research at PPR, a CoStar company. 

Approximately 33 million square feet of absorption occurred nationwide in third quarter for a total of 79 million square feet year-to-date, he said.

Rene Circ
“All we need is 3 million square feet of absorption in the fourth quarter to surpass absorption in 2012,” Circ added. “We are forecasting [the fourth-quarter total] to be closer to 30 million square feet.”

So what specifically is driving the recovery? The housing sector, for starters. “Housing was an anchor on the industrial market, but now that’s not the case,” Circ said. 

“The housing market has legs. That’s why we are seeing recovery in the light-industrial segment.”

In third quarter, approximately 60 percent of the 1,200 submarkets tracked by PPR saw improvement in the light-industrial segment — buildings that are approximately 100,000 square feet. 

Vacancies in that segment are about 7 percent, better than the 7.9 percent vacancy for the industrial market overall.

E-Commerce Remains Hot

Summey Orr
“When e-commerce first emerged, so many people said ‘That’s going to take commercial real estate under,’ but that doesn’t make sense,” said Summey Orr, managing partner of Hartman Simons.

 “Merchandise has to be housed somewhere. We’ve seen a lot more industrial development as big retailers are building large rapid-deployment centers closer to major commerce areas so the product can be shipped more quickly.”

Amazon has been the leader of this trend, said Sim Doughtie, president of King Industrial Realty Inc. “An economist from Texas A&M said that when Amazon had $58 billion in sales they had replaced approximately 128 regional malls,” he added.

“With Amazon delivering some items the same day, now that’s going to affect commercial real estate,” Orr said. “That means there are more opportunities for developers to get out there and find buildings to be a part of.”

Sim Doughtie
However, investors should be wary of the huge industrial distribution buildings that companies like Amazon are building, Circ said. “It’s a safe assumption that Amazon will leave after the first lease or possibly extend their lease for five years,” he said. “As an investor, you have to think about who would be willing to lease that space.”

Development Starting Again

Development has started to pick up, with strong industrial markets such as Houston, Dallas and Los Angeles seeing both speculative and build-to-suit activity, Doughtie said.

Markets like Chicago and Atlanta are still seeing more build-to-suit product, as vacancies in those markets still remain high. “For example, Atlanta has had 24 build-to-suit developments take place during the last couple of years, but only two speculative projects,” Doughtie added.

“We are actually doing a lot of deals where lenders are lending to developers to build new products,” Orr said. “That’s a real sign that this isn’t just a mythical recovery.”
For companies looking for new development sites, it’s imperative that they define their needs exactly, Doughtie said.

 “A lot of companies get off course because they don’t define clearly what it is that they want. They might have a national broker, but they need a local broker too who knows the market, incentives and where the properties are.”

A lawyer or broker can help navigate through the process of getting incentives for new developments or relocations, Orr said. “It’s becoming more and more important to use incentives. It can make a dramatic difference in the bottom line.”

The entire episode on the U.S. industrial market is available for download at www.CREshow.com.

Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta. Michael on Twitter and LinkedIn.

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