America’s industrial market, hard hit by the economic downturn, is back. And, say those in the industry, the sector is expected to undergo a structural shift in the years ahead.
“We are very encouraged by the recovery in the broader industrial market,” says Rene Circ, vice president and national director of research/industrial for Santa Ana, California–based Grubb & Ellis Company. “While total occupied square feet are still several quarters away from their pre-recession levels, local market conditions are getting closer and closer to experiencing sustained and meaningful net effective rent growth.”
Not only that, but the global industrial market is poised for major changes as companies reexamine their supply chain operations, says James J. Curtis III, managing partner of San Francisco–based Bristol Group, a nationally active real estate investment and development firm. “What is driving the market surge today is globalization,” he continues. “As the worldwide economy has recovered, so has the movement of goods in the global supply chain. The factors that will challenge the industrial market in the future will be increasing energy costs, environmental factors, and users shifting from the cheapest and fastest supply chain to more emphasis on reliability and redundancy.”
According to Circ, the national industrial market exceeded expectations during the 2011 first quarter with the strongest quarterly performance since the 2007 fourth quarter—absorption of some 31 million square feet (2.9 million sq m). “Construction has remained muted, with only 5 million square feet [465,000 sq m] delivered during the 2011 first quarter. About 13 million square feet [1.2 million sq m] remains under construction across the country. Improving demand and minimal new construction deliveries in the 2011 first quarter have driven the national vacancy rate down 70 basis points from its recent peak of 10.9 percent. Asking rental rates have bottomed, with preliminary numbers showing an increase of nearly 2.4 percent from the previous quarter, translating into 9.9 percent annualized growth.”
The U.S. industrial market is slowly recovering from its worst downturn in modern industrial cycles, agrees Curtis. “The reason this downturn has been worse than any of the other industrial downturns is due to the increasing dominance of consumer products and retail as a percentage of the entire industrial tenant base,” says Curtis, a trustee of the Urban Land Institute and a member of the Small Scale Development Council. “This has resulted in greater volatility in the industrial market.”
Among the major factors that will drive the industrial market in the future are labor arbitrage, increasing manufacturing costs, and a much greater sensitivity to sustainability, says Curtis.
“In the global business environment, how one manages its supply chain is the cornerstone to its overall business process,” he adds. “I think you’re going to find a shift back from manufacturing overseas, which will boost the industrial market in the United States. Labor costs in China are increasing and manufacturing has relocated from the coast to inland, and that has increased delivery time. So companies will begin looking at manufacturing closer to their consumers because it might be more cost effective and quicker. Once that happens, it will result in a shift of the supply chain in North America.”