DC Construction

Surge in US Distribution Center Construction

Corianne Egan, Associate Editor | May 27, 2014 5:19PM EDT

U.S. vacancy rates are trending down.

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Despite a surge in distribution center construction in the U.S., shippers and logistics firms are still clamoring for space, according to commercial real estate firm JLL. Completed industrial projects in the first quarter — mostly distribution centers — were over 90 percent higher than in the first quarter of 2013. In total, 27.1 million square feet were completed from January to March, slightly less than the previous quarter’s 31.1 million square feet.

The industrial development numbers include both factory space and distribution centers, although distribution centers make up roughly 75 percent of the industrial real estate market. The strong U.S. numbers regionally have come partially from a growth in e-commerce shipments, as most shippers aim to be no less than a one- or two-day drive from major population centers. U.S. manufacturing is also on the rise.

Space has become particularly tight on the coasts and in port-centered markets, leading those who are seeking facilities above 500,000 square feet to set their sights on secondary hubs, JLL said. “Secondary markets such as Columbus, Kansas City and California’s Central Valley are evolving as auxiliary hubs to the nation’s gateway centers since they offer a one-day drive time to population centers, and, as industrial corridors, have development sites to accommodate new construction,” JLL said. “They, in other words, present options for big-box occupiers.”

The Inland Empire area in southern California saw the most new space completed, a total of about 4 million square feet. Chicago, home of the nation’s largest inland port, saw 3.2 million square feet in new industrial real estate. Phoenix rounded out the top three, with 2.8 million square feet completed. Industrial real estate under construction also continued to increase. According to JLL, 122.8 million square feet of industrial space is under construction in the U.S., up 10 percent from the fourth quarter and a 96 percent rise from the first quarter of 2013. The amount of square footage under construction in the first quarter is the highest it’s been in the past two years.

The Inland Empire is slated to add 16.4 million square feet upon the completion of current facilities under construction, and Dallas/Fort Worth will add 15.8 million square feet. The Philadelphia/Harrisburg region has 10.1 million square feet under construction. Speculative construction, that is, facilities being built without a buyer or tenant, is an indicator of market strength, and it’s occurring in 40 of 50 U.S. markets currently tracked by JLL, suggesting a broad-based growth pattern in industrial development.

In particular, heavy spec construction is being seen in Southern California (25.6 percent of the 69.0 million square feet underway), the Southwest (31.5 percent) and the Midwest (18.5 percent), according to JLL. “What originally began on the West Coast in 2011 continues to spread east, and there are murmurs spec groundbreakings will return to markets such as St. Louis and Charlotte,” JLL said in its first quarter 2014 report.

The overall U.S. vacancy rate for industrial properties stood at 7.6 percent of the 11.6 billion total square feet available. The number of vacant square feet dropped 9.5 percent from the first quarter of 2013. Phoenix has the highest vacancy rate of the 50 U.S. markets tracked by JLL. Other markets with a large percentage of vacancies in the first quarter were Memphis, at 12.4 percent, and Sacramento, at 11.9 percent.

Conversely, New York boasts the lowest vacancy rate at 3.2 percent. Seattle, San Antonio, Portland, Orange County, California, Los Angeles, Long Island, Houston and Denver all have vacancy rates under 6 percent. The Inland Empire reported a 5.2 percent vacancy rate, JLL said. Average rent in the first quarter stood at $4.56 per square foot, 3.3 percent higher than in the first quarter of 2013. Premium space in New York City was going at an average of $18 per square foot, and California’s South Bay area came in at $11 per square foot. Because of the low amount of availability in those markets, rents are expected to continue to rise, especially in hotter markets.

Real estate companies are responding to the favorable market conditions. Denny Oklak, chairman and CEO of Duke Realty, said in an earnings call transcribed by SeekingAlpha.com that his company started $108 million in new industrial development construction. Three of the five projects are 100 percent pre-leased he said. The other two were started on a speculative basis, he said. “Most of our industrial portfolio is across the country are 95 percent [leased] or better, so they have all of the leverage that they need to go out and push rents and they are not that uncomfortable that we’re taking on a little bit of vacancy, given the strength of the market,” Oklak said.