2016 was a record-breaking year for the Industrial Market, ending with 1,164,000 square feet of positive net absorption, higher than seen at the peak in 2006.
Caldwell saw the highest absorption of 341,300 square feet, driven largely by the completion of Gayle Manufacturing’s new 166,200 square foot warehouse. The Airport submarket, with 6.4 percent vacancy, had the lowest net absorption with -80,200 square feet. This was due in part to Bodybuilding.com vacating 43,700 square feet with their move to Las Vegas.
The expectation that vacancy could not compress further has proven false as the overall vacancy rate declined to 4.5 percent and reached its lowest point since 2001. This leaves supply tight across all building sizes and gives tenants less room to be selective with real estate decisions. As a result, transactions are occurring quickly with less negotiation involved. With projected supply at only nine months, many leases are being signed before spaces even reach the market. Availability for spaces over 50,000 square feet is especially scarce.
The business mix of the Industrial market has become more diverse in recent years, with fewer tenants who are dependent on the housing market, such as plumbers, contractors, and sellers of goods like tile and granite. This year saw an unusual trend of investment sales making up nearly half of all industrial building sales. The number of buildings available for sale to end-users has declined over 15 percent since 2015.
Overall asking lease rates have increased from $0.48 to $0.50 per square foot (NNN, monthly). Class A asking rates also rose from $0.50 to $0.53 per square foot. Even with these increases, rental rates continue to be lower than those needed to justify and encourage new construction. In fact, speculative construction made up only 12 percent of the 802,000 square feet of new industrial construction in 2016. This is down from 37 percent of the total in 2015. Lease rates will likely need to reach the mid-$0.60 per square foot range in order for additional construction to make economic sense in the market.
*Above is an excerpt from Thornton Oliver Keller's Year End Market Watch. For a free copy, contact email@example.com.