‘Unbelievable’ Rent Growth During Past Quarter Spurring More Spec Warehouse

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Uptick in Logistics Construction Could Help Boost Sales, Satisfy Investor Demand for Modern Logistics Facilities

Logistics and light-industrial rental rates jumped by 6.7% for the 12-months ending in June 2016, leading all commercial property types by a wide margin as developers responded to rising demand for a diminishing supply of all types of warehouse and light manufacturing space with a flurry of speculative construction.

Year-over-year rent growth ranged from 4.9% for newer distribution buildings to more than 10% for light-manufacturing facilities in second-quarter 2016 as vacancy rates fell below their lowest point of the last cycle in virtually every segment of the U.S. industrial real estate market.

“The rent growth numbers are almost unbelievable, given the 0.9% long-term growth average,” said Rene Circ, CoStar’s director of research, industrial, who presented the Midyear 2016 U.S. Industrial Review and Forecast along with manager Shaw Lupton and real estate economist Christopher Kulig.

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The newest, best-located distribution centers captured the lion’s share of the 94 million square feet of net absorption in the first half of 2016, down slightly from last year but very strong relative to long-term averages, Lupton said.

The strong demand was evident in the results of Prologis (NYSE: PLD), the world’s largest warehouse and distribution center developer and operator, which last month described the first six months of 2016 as the strongest in the company’s history, with demand driven by e-commerce, third-party logistics companies, food and beverage and other consumer goods sellers.

New supply is ramping up to meet the strong demand, with developers delivering 81 million square feet of logistics and light-industrial space in the first six months of the year.

“Construction is progressing with a reasonable amount of discipline, and that’s good for the market,” Lupton said.

CoStar analysts said that in coming quarters, the steady acceleration of construction could help boost sales volume in the industrial property sector. Last year, several large transactions, such as Prologis and Norges Bank’s $5.9 billion purchase of KTR Real Estate, drove up investment sales volumes. Missing those types of large portfolio sales, this year’s sales volume was 32% lower in the second quarter from a year ago.

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The current inventory of 400 million square feet of warehouse/distribution space that is less than five years old is much lower than the 700 million square feet of stock on the market in 2009-10 and the nearly 900 million square feet of newer inventory in 2002-03.

Newer space, which typically accounts for about 25% of investment transaction volume, currently accounts for only 15%. But that number is on the rise, Lupton said.

“As more construction comes onto the market, chances are that there’s an investor who’s willing to buy it,” Lupton said, adding that new inventory available for purchase could boost existing sales volume levels by an additional 10%.

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