U.S. and Atlanta Market Update Q3 2016
While Q3 performance alone may not be anything to brag about for the industrial market, it remains the golden child for investors. Industrial has the most favorable outlook among all sectors, due to an ever-evolving e-commerce industry. And Atlanta – in particular, is giving us something to talk about.
Nationally, a total of 475 buildings delivered to the market in the quarter totaling 81,565,685 SF, with 234,403,350 SF still under construction at the end of Q3, according to CoStar.
“Once again, every metro posted positive rent growth for the quarter, although some outperformed others,” said economist Barbara Byrne Denham in REIS’ Q3 2016 Industrial First Glance report. The average quoted asking rental rate for available Industrial space was $6.01 per SF at the end of Q3, reported CoStar. This is a 1.3% increase from the end of Q2.
For Warehouse/Distribution overall, vacancy held steady and net absorption was 14.7 million SF in Q3, down from 21.8 million SF in Q2.While new construction has slowed (13.4 million SF in Q3 down from 19.6 million SF in Q2), 52% of the new construction was concentrated in five metros: Chicago (2.2 million SF), San Bernardino/Riverside (1.5 million SF), Atlanta (1.4 million SF), Houston (1.0 million SF) and Denver (740,000 SF). Among that 30% was preleased. In addition to 1.4 million SF of new warehouse/distribution construction, Atlanta also was one of the top 4 metros to experience the strongest decline in vacancy, along with Columbus, Orange County and Dallas.
For Flex/R&D, vacancy is down to 11.4%, down 20 basis points from Q2 and 90 basis points year-over-year. New construction in the quarter was 366,000, the lowest quarterly level since Q1 2014. Net absorption “held steady” at 3.9 million SF in Q3, said REIS.
“The conflicting trends in the two industrial types demonstrate once again that tenants’ demand for Flex/R&D space has not abated, yet developers have been less eager to build smaller buildings, opting for larger warehouse space instead,” said Denham.
The stage is set for success in the industrial sector when it comes to economic indicators. In fact, the warehousing and storage sector is the fastest growing industry in the U.S. National employment growth in this sector has grown by 3.8% in 2016 after growing by 8.4% in 2015. “This is significant and is indicative of future demand for warehousing space going forward,” reported REIS.Also, Amazon recently announced plans to open 20 grocery stores over the next two years, reported Business Insider. REIS notes that this should also increase demand for warehouse and distribution space.
Other positive data related to industrial demand includes: Aggregate trade numbers (goods exports plus imports) increased to an average of $308 billion from June through August, up from an average of just under $300 billion in the prior three months. The Institute for Supply Management’s purchasing managers’ index (PMI) climbed to 51.5 in September. “Any index above 50 indicates that economic activity in the manufacturing sector expanded,” per REIS.
The U.S. Census Bureau recently reported that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $459.8 billion, 2.7 % above September 2015.
REIS’ forecast hasn’t changed since Q2: “…the slow but steady rate of growth should continue going forward as most metros continue to see demand growth for industrial space. With limited new construction in most markets, vacancy should hold steady and continue to decline for Flex/R&D.” Rent growth is also expected to stay low unless economic indicators accelerate.
Spotlight on Atlanta
“Atlanta is one of a number of global markets where surging demand from e-commerce underpins a healthy demand environment for logistics real estate, according to Kent Mason, senior vice president/market officer for Prologis,” reported The Atlanta Business Chronicle.
‘“Demand for space is outpacing supply, and the result is higher rent and fewer concessions,” said Mason. “We expect positive market trends to continue through 2017.”’
There were 15,272,904 square feet of Industrial space under construction at the end of Q3, including the two largest projects: Majestic Airport Center IV – Building A, a 1,042,000 SF facility, and Baxter Plant, a 1,000,000 SF facility.
Nationally and locally, the industrial sector is the favorite and continues to give us plenty to talk about.
Bull Realty, Inc., Research