Industrial Construction Hits Highest Quarterly Volume on Record

Industrial Construction Hits Highest Quarterly Volume on Record

Only five years after the last recession, industrial construction has hit unprecedented levels, and many experts believe supply will still take another year or two to meet demand.

Industrial completions in the first quarter hit 60.1 million sq. ft., the highest quarterly volume on record, according to a recent report by real estate services firm Colliers International. Even with a national vacancy rate that has dropped to 6.3 percent, supply is outpaced by demand, with more than 63.8 million sq. ft. absorbed in the first quarter, almost 10 percent more than the amount absorbed in the first quarter of 2015.

The industrial market resurgence can be tracked to two simple fundamentals, according to Dwight Hotchkiss, Colliers’ national director for industrial sector—the cautious holdback on new construction during and immediately after the recession, and the increase in demand from retailers looking to grow their e-commerce capabilities. “We’ve had 22 quarters of positive absorption, with such a pent-up need for space that there’s been a backfill of deals that were waiting to get done,” he says.

There’s about 185.5 million sq. ft. currently under construction nationally, with the majority of that space speculative, according to Colliers. That’s less than a decade after one of the worst recessions on record, during which there was no speculative industrial development anywhere in the country. However, overall tenant requirements presently exceed the current spec pipeline in most of the nation’s major warehouse markets, according to both Colliers and a recent first quarter report from real estate services firm JLL.

However, it’s a handful of markets that is dominating the massive volumes of absorption and construction, according to JLL and Colliers. JLL data points to first quarter absorption in Atlanta (5.3 million sq. ft.), Chicago (5.2 million sq. ft.), Inland Empire (3.6 million sq. ft.), Dallas/Fort Worth (2.2 million sq. ft.) and Central Pennsylvania (2.2 million sq. ft.). Construction activity in these markets represents almost 50 percent of the national pipeline, according to JLL, with Dallas/Ft. Worth leading at 24.3 million sq. ft. and Chicago in second place at 16.9 million sq. ft. In Atlanta, more than 70 percent of the current new supply is speculative, and new Dallas/Ft. Worth space going up is almost without signed contracts, Colliers says.

Total spec deliveries are expected to reach 131 million sq. ft. this year, almost a 14 percent increase from 2015, according to JLL. This matches the expectation of a market with strong demand, where vacancies will remain low and absorption will continue to outpace supply, Hotchkiss says.

“We’re very bullish when talking to owners and investors,” he says. “It’s possible that maybe by the end of 2017 we’ll start to see more of a balance of supply starting to reach the level of demand, but I don’t think we’ll see that at least for the next 12-18 months. You look at the anticipated needs of [retailers] turning their strategy toward reaching same-day delivery, and decreasing store space, it all leads toward more of a demand for warehouse distribution product.”

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