national report industrial...

Industrial ResearchNational Report

Second Half 2016

Retailing and Warehousing Forge Closer Ties Through E-Commerce,Driving Elevated Performance in Industrial Property SectorTransitioning Retail Spending Hab-its Channel Distribution Demands. At the end of the second quarter, U.S. industrial properties posted the lowest vacancy rate in 16 years. Gains in retail sales, resurgent residential construc-tion and the steady performance of U.S. manufacturers producing for the domes-tic market are driving the shipment and warehousing of goods, supporting a strong outlook for the sector. The sale of retail items, though, remains the princi-pal force propelling the sector’s extend-ed upswing, which is now in its seventh year. Purchases of long-lasting big-ticket items, including autos, illustrate an ele-vated sense of economic security among consumers, and a low rate of inflation augments purchasing power. Millennials are also emerging as a potent econom-ic force and as a contributing factor be-hind the creation of new ways to distrib-

ute goods to consumers. Omnichannel distribution, which combines traditional store locations with an online function, continues to pioneer changes in indus-trial property site selection and layouts. High-throughput spaces featuring exten-sive automation and loading bays to ac-commodate local delivery vans are two of the characteristics needed to fulfill prom-ises of expedited delivery to customers. As retailers scale up digital distribution networks and expand the range of prod-ucts for immediate delivery, new space specifications and needs will emerge in this new segment.

E-Commerce Drives Industrial Space Absorption. Amazon remains at the fore-front of Internet retailing and continues to exert a profound effect on industrial prop-erty construction and retailer strategies. The e-commerce stalwart is expected

to operate more than 70 fulfillment and sorting centers by the end of 2016, near-ly two times the number in use in 2011. The movement of more retail sales on-line and through warehouses and fulfill-ment centers is also creating potentially new strategies in the investment market for some owners of properties near ma-jor population centers. Owners of ware-house and distribution centers adaptable to the rapid movement of goods required in e-commerce may increasingly seek to test the market in the coming months. For owners of other industrial assets, the combination of sustained equity flows and access to acquisition debt will sup-port a liquid investment market in the months ahead. Flex properties in metros with tight office sectors and limited con-struction may command interest, while repurposing older assets will garner the attention of development-minded parties.

2016 Annual Industrial Forecast

Vacancy:40 basis point

decrease in vacancy The U.S. vacancy rate will decline 40 basis points this year to 5.9 percent on net absorption of more than 200 million square feet. Nearly 1.1 billion square feet of industrial space has been occu-pied since the vacancy rate peaked more than six years ago.

Employment:U.S. employers will add 2.1 million jobs in 2016, triggering the formation of new households and additional retail spending. Increases in employment in construction and at manufacturers that produce for the domestic market mark positive trends for industrial property operations.

1.5% increase in total employment

Construction:Developers will complete projects totaling 190 million square feet in 2016. Deliveries in major regional distribution hubs, including Atlanta, Chicago, Dallas/Fort Worth, Houston and the Inland Empire, will account for more than half of the space delivered nationwide this year.

190 mil. sq. ft will be completed

Rents:Tight vacancy will support a 5.0 percent climb in the average rent nationwide to $6.30 per square foot in 2016, slowing from last year’s rate of growth. Markets with access to points of entry on both coasts will outpace this rate. Farther inland, Chicago and Denver will also outpace this growth.

5.0% increase in asking rents

Sustained Pace of Economic GrowthProvides Momentum for Industrial SectorSeveral facets of the U.S. economy continue to grow and are providing stout support for the operation of industrial properties across the U.S. Overall, the modest pace of economic growth has minimized the threat of bubbles de-veloping and potential disruptions to consumption trends. Several domestic manufacturing segments are growing and supporting the movement of goods between suppliers’ warehouses, factories and distribution points, though pro-ducers making products for shipment abroad face some headwinds. Growing construction trades also represent a source of new demand for space in small bay industrial properties in many markets. New residential construction contin-ues to rise, while home remodeling businesses are also expanding as housing prices increase. Greater growth in space demand related to construction trades could occur as building accelerates, raising residential building’s contribution to GDP closer to its historic norm.

Retail trade remains a key generator of demand for warehouse and distribution space. As measured year over year, sales excluding automobiles and gasoline continue to grow roughly 4 percent, in line with the long-term average. E-com-merce is the fastest-growing retail segment and is inspiring a reconsideration of the functions and physical characteristics of warehouse and distribution fa-cilities. Beginning at a negligible level as recently as 10 years ago, e-commerce currently accounts for more than 14 percent of core retail sales and has grown at a double-digit annual pace for much of this year. The placement of order fulfillment centers near major population centers to keep promises of expedit-ed delivery represents a prominent trend driving the industrial property sector. Building sizes are also shrinking to the 250,000- to 350,000-square-foot range and clear heights are rising to fit properties onto sites in land-constrained urban areas near customers.

2016 Economic Outlook• Imports are virtually flat at major ports on both coasts so far this year as re-

tailers cut orders to reduce inventories at stores and warehouses that service stores, reflecting the shift of more retail spending online. Retailers continue to carry excess stocks of goods and the rise of the inventory-to-sales ratio to the highest level since 2009 may signal fewer near-term new space require-ments for traditional distribution.

• U.S. employers created an average of more than 200,000 jobs per month over the past year. Low unemployment claims, wage growth and job open-ings that sit near an all-time high provide further evidence of positive labor market trends. Sustained growth in spending by U.S. households will likely ensue in the coming months as additional individuals enter the workforce and other workers change jobs, presumably for higher pay.

• The soft performance of some segments of the economy imposes a potential hurdle for attaining a higher level of industrial property operations. Wholesal-ers that export, a source of space demand in many properties, continue to face a challenging environment that is contributing to declines in wholesale sales since a peak was hit two years ago. Also, the rotary rig count, an indi-cator of oil and gas drilling, has risen from low levels, but the modest upturn is unlikely to initiate expansions by suppliers and equipment fabricators in the near term.

* Through July ** Through June Forecast

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Retailers’ Inventories Rising

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E-Commerce Growing

Oil & Gas Rigs

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3

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Total Employment Transportation & Warehousing

$10

$20

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1.35

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1.65

1.80

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600

1,200

1,800

2,400

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National Economy

Restrained Supply Growth Shifts Demand,Underpins Reduction in VacancyPositive trends in retail sales and residential construction, and a contribution from manufacturing, are sustaining tight vacancy in the U.S. industrial property sector. Tenants occupied additional space in the first half of 2016 to keep the sector on target for a drop in full-year vacancy, while dwindling availability lifted rents. Lower vacancy and climbing rents may trigger additional construction in the near term. Properties completed in the first two quarters illustrated a greater willingness among developers to undertake speculative projects. While many of this year’s new properties measuring 1 million square feet or more were sub-stantially leased at midyear, higher vacancy in buildings of less than 500,000 square feet indicates an acceptance of near-term leasing risk. Developers with secured sites and permits in hand may accelerate the pace of starts in the near term and decide between constructing e-commerce ready properties or assets suitable for a wider range of traditional tenants.

Approximately 70 million square feet of space is slated to come online in the second half of the year. A considerable portion of the total is speculative, but the effect on the vacancy rate will be minimal as space demand continues to grow through new business openings and tenant expansions. The presence of functionally obsolete space, a constant in the industrial property sector, may potentially complicate efforts to match tenants with spaces that suit their re-quirements, as well as encourage additional construction. Among the segments of the economy expected to drive space demand, e-commerce continues to provide a stiff push for the sector in general and a source of tenants near major population centers in particular. Additional growth in residential construction, meanwhile, will also generate new needs for suites in multi-tenant properties by building trades and construction trade vendors.

2016 National Industrial Forecast• Almost one-quarter of the industrial inventory delivered in 2016 will be in the

Central Southwest division of the U.S., with the South Atlantic and Pacific divisions following with 16 percent of new inventory in each. One metro in each division comprises approximately one-half of each area’s development: Dallas/Fort Worth with 26 million square feet, Atlanta with 20 million square feet and Inland Empire with 22 million square feet.

• Tight vacancy in many markets will shift the focus of achieving higher NOI growth to managing lease rollovers and imposing higher rents. Following a 3 percent jump in the first half of this year, the average rent nationally climbed 5.6 percent over the past 12 months. Among the set of markets that outper-formed during the period were Los Angeles and the Inland Empire, where port and logistics operations continue to drive demand. Austin and San Jose also posted robust rent gains, perhaps reflecting needs for inexpensive space by budget-conscious tech startups.

• Dollar volume and transaction velocity declined in the first half of 2016 from the corresponding period last year, reflecting a drop in portfolio and enti-ty-level transactions. Single-asset sales, however, rose modestly as property owners leveraged strong investor interest and debt accessibility to execute transactions. Cap rates have compressed modestly over the past year, with Class A cap rates now in the high-6 percent range. Initial yields on Class B and Class C cap rates have also come in, narrowing the spread between the class extremes to the lowest level in the current cycle.

National Industrial Overview

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Industrial Absorption & Vacancy

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Class A Class B Class C

* Forecast** Trailing 12 months through second quarter

* Forecast** Trailing 12 months through JulySources: CoStar Group, Inc.; Real Capital Analytics

Demand for E-Commerce Sparks Flurry Of Construction; Buyer Activity StrengthensRobust household growth and a rise in consumer spending throughout the Southeast have underpinned demand for industrial space in Atlanta. Vacancy levels have been cut in half since 2010, reaching a cycle low in the second quar-ter. These tightening conditions and new tenant requirements have generated a need for industrial space. To meet market demand, this year’s construction will surpass the previous high set in 2007. The largest concentration of deliveries this year, of 8 million square feet, surrounds Hartsfield-Jackson Atlanta Inter-national Airport. Areas farther south in Henry County and northwest of Central Atlanta, primarily in Kennesaw, have approximately 3 million square feet being added to stock this year. Approximately half of the deliveries coming to market this year are pre-leased as corporations including FedEx and Smucker’s move into newly built space. To garner interest for the remaining unoccupied facilities, builders are creating adaptable spaces for just-in-time distributors as consumer demand for faster service and shipping grows. Year to date, approximately the same amount of square footage delivered has been absorbed and up to 20 percent of the remaining inventory to be completed this year is presently leased. This will place upward pressure in the market’s full-year average vacancy as the space is leased, but vacancy will remain below the past five-year average, allowing an increase in the average asking rent.

Inexpensive debt and tight operations are keeping investors active in pursuing Atlanta’s industrial assets. Transaction volume has increased 22 percent over the last four quarters, compressing the average cap rate nearly 100 basis points during this period to the low-7 percent range. Light distribution facilities and manufacturing buildings with less than 100,000 square foot were targeted, par-ticularly in the northern portion of the metro. These trades changed hands with average first-year yields in the low-8 to high-9 percent domain. Several distribu-tion facilities in the Northeastern submarket traded in the mid-6 percent range. Warehousing properties in southern Atlanta and along Fulton Industrial Boule-vard, just south of Interstate 20, traded with cap rates in the 5 percent range.

2016 Market Forecast• Employment: Atlanta firms will hire 75,000 workers this year, a 2.9 percent

payroll expansion. In 2015, employers created 70,400 jobs.

• Construction: Activity is picking up in the metro as builders are on track to deliver nearly 20 million square feet of space this year. Last year, more than 10.9 million square feet of space was finalized.

• Vacancy: Vacancy will increase 10 basis points to 7.4 percent this year. This follows an 80-basis-point drop in the rate during 2015.

• Rent: The average asking rent will jump 5.9 percent in 2016 to $3.96 per square foot after a 4.5 percent rise last year. This will place the average rental rate per square foot above the previous business cycle peak.

• Investment: Distribution and warehousing facilities with approximately 100,000 square feet that are easily accessible by consumers yet have a ceiling height be-low current specifications will be in demand for new mixed-use opportunities.

AtlantaS

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$30

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Completions Absorption Vacancy

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Metro United States

* Forecast** Trailing 12 months through July

Sources: CoStar Group, Inc.; Real Capital Analytics

Charleston

Developers Moderate Deliveries This Year, Lay Groundwork for Future GrowthStrong demand for goods and services is bolstering Charleston’s industrial mar-ket. A population gain of roughly 11,800 people over the last 12 months is generating demand for goods and services. This growth, combined with a rise in e-commerce and the expectation of same-day delivery, is underpinning the need for warehouse space. To help meet this increase, a $44 million project to upgrade and expand facilities at the Port of Charleston is underway that will enhance the capability of distribution and logistics companies. In order to prepare for expected growth, developers completed 2.5 million square feet of warehouse space over the last four quarters, temporarily pushing warehouse vacancy up 90 basis points to 8.3 percent in the second quarter. Deliveries will ease in the second half of this year, allowing demand to catch up with supply. A restrained supply of additional flex space has tightened vacancy in this segment to 3.3 percent in the second quarter, a 150-basis-point drop year over year. A lack of new flex inventory through the end of this year will keep vacancy low and push rents higher. While deliveries will temporarily slow in 2016, the pause will be short lived, as there is 11.6 million square feet underway. Volvo has a 2.3 mil-lion-square-foot building under construction in Ridgeville and Mercedes Benz has just begun work on a 8.6 million-square-foot facility in North Charleston. Both facilities are expected to open in 2018.

Solid industrial operations and higher returns than are available in many larger markets are drawing out-of-state investors to industrial assets in Charleston. Demand is especially robust in North Charleston. The underway Mercedes Benz facility in the city is bolstering demand from suppliers for space nearby and vacancy sits below the metro average. Buyers are also moving farther out into Berkeley County. The new Volvo facility under construction is attracting other businesses to properties nearby, growing the industrial presence in the county and luring investors. Recently delivered speculative construction is also drawing buyer interest.

2016 Market Forecast• Employment: Charleston employers will create 10,000 jobs during 2016,

a growth rate of 3.0 percent. This total includes more than 1,300 manufac-turing positions. Last year, a 3.1 percent gain was recorded.

• Construction: Developers will finalize 1.8 million square feet of space this year after 2.2 million square feet was delivered last year. Another 11.6 million square feet is underway with deliveries scheduled into 2018.

• Vacancy: The slowing construction pipeline and strong absorption will re-sult in vacancy falling 30 basis points to 7.4 percent in 2016. This is the tight-est year-end rate since 2008 and follows a 40-basis-point reduction last year.

• Rent: Asking rents will advance 8.8 percent to an average of $5.48 per square foot in 2016. This will place rents 1.4 percent below the 2008 peak. Last year, rents climbed 8.9 percent.

• Investment: The upgraded facilities at the Port of Charleston should ben-efit nearby properties and attract investors to the area.

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$48

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Demand for Space Surges, Rents Reach New High in ChicagoStrengthening job growth and rising incomes are underpinning demand for goods and services, which is bolstering the Chicago industrial market. In ad-dition, the growing expectation of same-day delivery is generating demand for warehouse and distribution facilities. Developers added 15.3 million square feet to inventory in the last four quarters as the need for industrial space surged. Still, vacancy at midyear declined 70 basis points year over year to 6.9 percent, the lowest rate in 10 years. Despite an inventory expansion, demand is especially robust in the O’Hare submarket where vacancy plummeted 200 basis points in the last 12 months to 4.6 percent. Vacancy is also below 5 percent in the West Suburban submarket and in Kenosha County, where lower tax rates at-tract businesses to Wisconsin. The tightening supply of available inventory has facilitated three consecutive years of rent growth. The metro’s average asking rent sat at $5.34 per square foot in June, 4 percent above the previous peak reached in 2008.

Capital continues to flow into Chicagoland, buoyed by improving fundamentals, new inventory and higher yields than are available in many coastal markets. The increased competition for available assets is driving prices up. At the top end of the market, the growing supply of new inventory is keeping high-net-worth investors active at cap rates that typically begin in the 5 percent span but can dip below that for best-of-class properties. While the majority of buyers are tar-geting buildings within Cook County, recently completed projects and lower tax rates are drawing some investors to neighboring Kane and DuPage counties. Value-add investors, meanwhile, are targeting older properties with good ac-cess along prime industrial corridors that generally trade at initial yields in the 7 to 8 percent range. Functionally obsolete buildings with a lot of parking spaces are sought by investors looking to repurpose assets.

2016 Market Forecast• Employment: Chicago employers will create 60,000 jobs in 2016, a 1.3

percent increase. A 1.4 percent gain was recorded last year, led by growth in the trade, transportation and utilities sector.

• Construction: During 2016, construction will ease as developers com-plete 15.7 million square feet of industrial space, down from the 17.3 million square delivered last year.

• Vacancy: Speculative completions in the second half of the year will do little to slow vacancy improvement during 2016. Vacancy will tumble 90 basis points to 6.2 percent, following a 70-basis-point decline last year.

• Rent: The average asking rent will reach a nine-year high in 2016, rising 5.3 percent to $5.55 per square foot at year-end. A 7.1 percent surge was registered last year.

• Investment: Lower prices and more favorable tax rates combined with the potential for higher yields are moving some investors to the outskirts of the metro to consider properties in Indiana or Wisconsin.

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Cleveland

Vacancy Continues Downward Trend; Surging Construction to Keep Pace With DemandCleveland’s prime location along Lake Erie and the Cuyahoga River has made the metro a hotbed for industrial assets. The market’s average vacancy rate has continued on a steady six-year decline, reaching a record low of 5.2 percent in the second quarter. Tightening conditions and strong demand for industrial space have amplified construction over the last four quarters, with deliveries expected to reach a cycle high at year-end. The majority of the completions this year will be located within the high-inventory Southeast submarket. Several of these buildings can be found off exits along major transit routes, including the newly constructed facility occupied by Arhaus Furniture near Highway 8. The company’s 740,000-square-foot distribution center and new corporate head-quarters opened in the first half of 2016. Despite the higher level of industrial de-velopment, a significant amount of the new space is pre-leased, placing further downward pressure on the vacancy rate and driving an increase in the average asking rent.

Demand for Cleveland’s industrial properties remains healthy, maintaining a steady flow of transactions while market fundamentals improve. Strong buyer interest in the metro’s assets has elevated prices, particularly in smaller 10,000- to 25,000-square-foot facilities. Manufacturing and warehousing properties in southern submarkets and along the exits of State Route 2 have garnered signifi-cant buyer attention. Additionally, several older facilies near large consumer bases are being targeted for creative mixed-use opportunities. Value-seeking investors are searching for assets within Stark County where average yields can range around 10 percent. Overall, the average first-year return for an industrial asset in Cleveland traded in the mid-8 percent band during the last 12-month period.

2016 Market Forecast• Employment: Employers will add 14,000 positions in 2016, a 1.3 percent

workforce expansion. Last year, 13,000 jobs were created, with hiring led by the education and health services sector.

• Construction: After completing 1.2 million square feet of space in 2015, activity will heighten this year as developers are on track to finalize 1.5 million square feet of industrial space.

• Vacancy: As a significant number of deliveries are pre-leased and demand remains high, the average vacancy rate will drop 90 basis points this year to 4.5 percent. This exceeds last year’s 50-basis-point decline.

• Rent: The average asking rent will reach a cycle high this year, rising 3.7 percent to $3.90 per square foot. In 2015, average rent climbed 3.6 percent.

• Investment: Healthy operations and value-add opportunities will drive in-vestors to Cleveland. Properties along major transit routes and near Lake Erie will continue to pique investors’ interest.

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Industrial Demand Driven by Retail Growth; Strong Operations Attract Buyers to Metroplex

Dallas/Fort Worth’s central location within the country makes it a vital area for distribution and logistics facilities, and a shift in the way individuals shop is fu-eling demand for industrial space in the market. Several major transportation routes run through or near the Metroplex, drawing e-commerce and third-party logistics companies to expand in the area, keeping vacancy historically low and bolstering industrial development. In the last 12 months, wholesale trade and warehousing employers added more than 22,000 positions as major compa-nies such as Amazon, Wal-Mart and FedEx opened new facilities across the market. Despite the addition of nearly 40 million square feet of industrial space during the last two years, vacancy rests near historical lows, encouraging aver-age annual rent gains above 4.8 percent during the same span. This year, com-pletions will reach the highest level since 2008 and vacancy will tick up slightly as space demand remains strong.

Out-of-state capital continues to filter into the buyer pool, strengthening sales activity for area industrial assets. Healthy job growth and the attraction to the metro’s centralized distribution location are drawing these investors into the market. In the last year, deal flow accelerated slightly as local buyers remain the dominant player; however, one in four assets traded to out-of-state investors. The rising demand for industrial properties spurred strong price appreciation over this time period, and cap rates averaged in the mid-8 percent area during the span. Buyer interest is high for properties priced between $1 million and $5 million, and prices jumped nearly 20 percent over the last year for properties in this price tranche. Assets in the South Stemmons, East Dallas and Great South-west/Arlington areas are in high demand and first-year returns compressed as low as the mid-7 percent area in these submarkets over the last year.

2016 Market Forecast• Employment: Metroplex employers will create 105,000 positions this year,

expanding headcounts 3.0 percent from the end of 2015. Jobs increased 3.8 percent annually last year with the addition of 126,800 workers.

• Construction: Following the completion of more than 18 million square feet of industrial space last year, builders will deliver nearly 26 million square feet of space by year-end 2016.

• Vacancy: Robust deliveries will outweigh demand this year, and vacancy will rise to 7.3 percent, a 10-basis-point annual increase on net absorption of more than 22 million square feet. In 2015, the rate fell 40 basis points.

• Rent: The average asking rent will advance this year, albeit at a slower pace. A 3.3 percent year-over-year rise will push the average to $4.75 per square foot by year-end 2016. The average rent rose 4.3 percent last year.

• Investment: Out-of-state buyers will continue to target the market for indus-trial assets, seeking higher yields than those found in coastal markets. Properties in industrial-heavy areas, such as near the airport and along major transportation routes throughout the Metroplex, will be in highest demand.

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Tight Conditions Encourage Developers In Denver; Demand for Industrial Assets RisesStrong demand for industrial space in the Denver metro has pushed vacancy well below historical lows and encouraged healthy rent gains. Rent growth has been strong over the past four years, rising by more than 11 percent annually on average as vacancy has plunged 470 basis points since mid-2009. Tightened conditions have prompted developers to move forward with millions of square feet in industrial projects. Builders have targeted the East I-70/Montebello sub-market during the past four years, bringing nearly 4.6 million square feet of industrial space online in the area during the span. In the past, builders were focused on projects containing less than 150,000 square feet, though several large projects have broken ground this year to meet the rising demand from e-commerce and other warehouse and distribution users. This trend will persist through the remainder of the year as companies sign leases for newly delivered space, keeping vacancy for warehouse properties near 4 percent through year-end. Though supply additions will outweigh demand for space this year, overall vacancy will remain at one of the tightest levels this decade, spurring strong rent growth in the months to come.

Demand for Denver industrial assets remains strong, contributing to healthy competition for properties. A limited number of assets available for sale is keep-ing transaction velocity subdued so far this year, and rising interest from own-er-users is increasing the buyer pool for area properties. Surging rents over the past few years have benefited NOIs and property values, encouraging some owners to hold on to listings riding positive momentum. The pace of growth is beginning to slow, however, which could prompt some owners to list assets and capitalize on rising prices and strong buyer demand. Those choosing to divest now will be met with strong buyer interest, boosting the opportunity to meet pricing objectives. Buyers are targeting all areas of the metro for industrial as-sets, though properties located in Montebello, South Santa Fe and Boulder are in high demand. Cap rates for assets in these areas are in the high-6 to low-7 percent range, while the initial yields for properties in the eastern portion of the metro average 50 basis points higher.

2016 Market Forecast• Employment: Employers will add 39,000 workers during 2016, expanding

headcounts 2.8 percent annually. In 2015, employment grew 2.7 percent.

• Construction: Following the delivery of 1.0 million square feet of industrial space in 2015, builders will complete 3.7 million square feet this year.

• Vacancy: Supply additions will slightly outweigh demand this year and va-cancy will reach 4.3 percent, rising 30 basis points year over year. Last year, the vacancy rate ticked up 10 basis points.

• Rent: The average asking rent will rise 8.1 percent during 2016 to $7.90 per square foot. This follows a 15.7 percent annual increase last year.

• Investment: Healthy operations will continue to draw investors to Denver in the coming months. Buyers will target areas such as Montebello and South Santa Fe inside the metro, as well as the northwest corridor toward Boulder.

Denver

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$60

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$100

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Metro United States

0%

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16%

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Metro United States


Expanding Auto Suppliers Fill Space in Detroit;Improving Operations Rev Up InvestorsThe Detroit industrial market has made great strides in recent years. A large portion of the metro’s improvement can be traced to auto-industry suppliers. Sales of vehicles have remained heightened, requiring many companies to ex-pand into bigger space to keep pace with demand. Another driver for industrial space is e-commerce. Same-day delivery is creating a need for large distribu-tion facilities on the periphery of the metro and for smaller warehouse space closer to densely populated neighborhoods. The increased demand for space has dropped metrowide vacancy to a third of what it was at midyear 2012 and vacancy rests below 6 percent in all but one submarket. A vast supply of func-tionally obsolete buildings in the Detroit Area submarket, which encompasses the city of Detroit, are keeping the vacancy rate there in double digits. Many of the older buildings are ripe for redevelopment as revitalization extends farther into the city’s neighborhoods. The region has also benefited from a restrained development pipeline. Although speculative construction is on the rise, build-to-suit projects dominate new inventory. The dwindling supply of available space has brought rents to within 5 percent of the 10-year peak reached in 2007.

Improving NOIs and the potential for higher yields are drawing new capital to assets in Detroit. More favorable news coverage in recent years is changing the perception of many out-of-state investors and some are willing to consider assets in the metro. Although intense investor interest has tightened the supply of distressed listings in recent quarters, improving property performance will likely motivate more owners who do not want to hold through the next cycle to consider listing assets. Buildings in redeveloping areas are attractive to local investors as surrounding property values climb. Additional assets at the top end of the market have also become available as some REITs change strategy and begin to divest their holdings. Properties in prime locations with long remaining lease terms will typically begin trading in the low-6 percent area.

2016 Market Forecast• Employment: Detroit employers are on track to add 38,000 workers to

payrolls in 2016, a 1.9 percent expansion. Last year, 34,400 jobs were creat-ed, including 2,500 manufacturing positions.

• Construction: A total of 2.0 million square feet of industrial space will be added to inventory in 2016, the bulk of which will be in the I-96 Corridor sub-market. Last year 2.4 million square feet was completed.

• Vacancy: Demand for industrial space will drop vacancy 120 basis points in 2016 to 4.0 percent, the lowest rate since 2000. Last year, the rate plum-meted 170 basis points as net absorption reached 10.2 million square feet.

• Rent: Asking rents will climb for the fifth consecutive year. During 2016, rents will rise 4.3 percent to $4.80 per square foot, after a 6.2 percent jump was recorded last year.

• Investment: Older suburban assets with good visibility, access and the potential to be repurposed will garner the attention of value-add investors. Cap rates for these properties can begin above 8 percent depending on quality and location.

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3

6

9

12

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4%

6%

8%

10%

$18

$25

$32

$39

$46

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Metro United States

0%

1%

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4%


Year

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0%

2%

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6%

8%

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Metro United States



Industrial Investors Encouraged By Houston’s Long-Term Economic OutlookHouston’s industrial market is showing some resiliency this year as vacancy stays tight amid robust completions. Consumers’ increasing desire to order products online with a quick delivery time keeps tenant demand for warehouse space strong. As these users expand, the overall impact of reductions in man-ufacturing caused by the energy-serving sector has slowed. Both Amazon and Ikea are building new distribution facilities in the market, taking 855,000 square feet and 1 million square feet, respectively, in area industrial parks. To meet the rising demand for quality distribution and showroom space, speculative proj-ects will break ground this quarter in two new industrial parks. While the impact of low energy prices has dampened aggressive occupancy gains this year, va-cancy will rise just slightly above the national rate, driven largely by the record amount of sublease space flooding the market. As more space becomes avail-able, advances in the market’s average asking rent will slow in 2016.

Investment activity remains robust in the Houston industrial market, with trans-action velocity holding firm year over year, based on the trailing 12-month period ending in June. Many buyers are viewing softening market conditions as an opportunity to purchase at a lower price than 12 to 18 months ago. Those with long-term hold strategies are willing to deal with short-term vacancy for an an-ticipated future payoff due to the cyclical nature of the energy market. Investors are searching all areas of the market for deals, while industrial properties in the northwest portion of the metro are the most heavily targeted. These assets are trading with average cap rates in the 6 percent area, depending on building age, tenant credit and lease terms. In addition, warehouse assets priced between $1 million and $5 million are in highest demand among local investors, trading at first-year returns averaging in the 8 percent to 9 percent range. Houston’s preparation for the opening of a wider Panama Canal by dredging the ship channel to accommodate larger container ships and adding additional ware-house space will drive investor interest to this area.

2016 Market Forecast• Employment: Houston employers will create 5,000 jobs in 2016, expand-

ing headcounts 0.2 percent from the end of last year. The metro’s employ-ment base grew by 20,700 workers in 2015, an annual growth of 0.7 percent.

• Construction: Completions in the metro will rise to 15.2 million square feet this year following the delivery of 12.7 million square feet in 2015.

• Vacancy: As supply additions reach a 10-year high this year, vacancy will rise 120 basis points to 6.0 percent. Last year, the vacancy rate increased 20 basis points.

• Rent: The pace of rent growth will slow in 2016 and the average will tick up 0.8 percent to $6.70 per square foot. Last year, rent advanced 8.5 percent.

• Investment: The cyclical nature of the energy market will spur buyers to weigh the opportunity cost of purchasing underperforming assets while asset prices are more favorable. Those choosing to invest now will be encouraged by low interest rates and tight cap rates in other real estate sectors.

Houston

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9%

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Metro United States


Pause in Construction Boosts Occupancy;Yields Attract Buyers to Indianapolis MarketIndianapolis’ central location in the country makes it a prime hub for logistics and distribution and the surge in e-commerce is generating demand for these buildings. Chewy.com recently joined Amazon, Express Scripts and Wal-Mart with a fulfillment facility in the metro. Due to the strong demand for industrial space, vacancy is expected to drop below 6.0 percent in 2016 for the first time in four years. The rate is especially tight in southeast Indianapolis where robust demand amid a lack of new inventory has dropped vacancy to a 10-year low of 2.2 percent at midyear. Throughout the metro, deliveries reached the highest rate in nine years at nearly 7.0 million square feet in 2015, with speculative con-struction soaring. Development activity, however, has fallen off sharply and only 1.7 million square feet is expected to be brought into service this year, which will allow demand to overtake inventory growth. Construction activity is poised to resume with more than 3.0 million square feet of build-to-suit projects expected to get underway in the coming quarters and completions scheduled into 2018. Despite tightening vacancy, rent growth has fluctuated in recent years. The av-erarge asking rent in the second quarter reached $3.74 per square foot, 14.0 percent below the 10-year peak attained in 2010.

Capital continues to flow into Indianapolis industrial assets as lower entry costs and the potential for higher yields than many other larger markets attract new buyers to the region. The expanding buyer pool is pushing demand above the supply of available listings. Recently built properties located close to the airport with interstate access are drawing buyers at the top end of the market to Plain-field and Brownsburg in Hendricks County, where warehouse facilities are most often targeted. Competition for the listed properties in this area has some inves-tors moving north along the interstate system. Many private investors, mean-while, are targeting Class B assets along major transportation corridors within Indianapolis. Buildings in the southwest portion of the city that can be renovated to attract new tenants and have rents adjusted to market rate are especially desired at cap rates that average in the 7 to 8 percent range.

2016 Market Forecast• Employment: Job growth of 1.5 percent is forecast in Indianapolis during

2016 as employers add 15,000 workers. Last year, 24,800 positions were created, a 2.5 percent expansion.

• Construction: Roughly 1.7 million square feet of space will be completed this year, the lowest level of deliveries in four years. During 2015, 6.9 million square feet was brought into service.

• Vacancy: The slowing pace of construction amid steady demand for space will drop the vacancy rate 190 basis points to 5.8 percent in 2016, the lowest rate since 2012. A 20-basis-point decline was registered last year.

• Rent: Asking rents will increase 4.1 percent to an average of $3.85 this year, following a 1.1 percent gain last year.

• Investment: New inventory, interstate access and fast population growth in cities such as Zionsville and Whitestown are attracting more buyers to assets in Boone County.

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$36

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$44

$48

$52

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Metro United States

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Year

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-8%

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Tight Conditions Foster Space Grab; Owner-Users Highly Active in the MarketplaceThe Los Angeles industrial market is benefiting from a strong economy as new construction remains scarce. Older, urban warehouses are being converted to new apartment and mixed-use projects. The industrial market has remained perpetually undersupplied as developers have focused the majority of their ef-forts on meeting local housing needs, leading vacancy to one of the lowest levels ever recorded in the county. Although planned projects will exceed 4 million square feet for the first time since 2007, the pace of net absorption in the market has more than doubled that mark for two straight years, underscoring the incredibly tight operating conditions currently in place. While more than half of the upcoming space is already pre-leased, a number of sizable offerings in the central portions of the county and in the San Gabriel Valley will allow ten-ants seeking spaces to find suitable options. Tenants seeking locations near the twin ports or the airport will face a greater challenge, with nearby submarkets registering vacancy well below 2 percent. The incredibly tight conditions have warranted significant growth in the average asking rent level over the past sev-eral years, with a mid- to high-single-digit rise in each of the last four years. The pickup in development will do little to constrain this advancement, with metro rents set to rise at a high-single-digit pace in 2016.

As commercial credit has remained abundant and interest rates have stayed subdued, investors and owner-users have been active in acquiring industrial properties. The search for yield has drawn investors from other property types to industrial assets, where cap rates will begin in the mid-5 percent range, offer-ing an attractive yield. The most consistent and motivated buyers in the metro have been owner-users seeking well-located available spaces for expansion purposes. Traditional industrial strongholds such as the City of Industry, Los Angeles, and Gardena have been the most active markets, benefiting from the proximity to major transportation and distribution networks. An uptick in devel-opment will have little effect on long-term space concerns, prompting an active dealmaking environment as the year progresses.

2016 Market Forecast• Employment: Los Angeles organizations will hire 85,000 new workers this

year, a 2.0 percent growth rate. This follows the 2.7 percent pace of improve-ment recorded in 2015.

• Construction: Developers will complete 4.4 million square feet of industrial space this year, up from 3.0 million square feet last year.

• Vacancy: A slowdown in net absorption coupled with a higher pace of de-velopment will trigger a 20-basis-point rise in the metro vacancy rate to 2.2 percent. Last year, vacancy contracted 110 basis points.

• Rent: After rising 8.8 percent in 2015, the average asking rent will advance 7.0 percent this year to $9.31 per square foot.

• Investment: Properties offering quick access to transportation routes near the twin ports will see tremendous interest from both owner-users and private investors. Buildings with office space components will trade at a premium.

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$100

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Concentrated Development Sponsoring Tight Operations, Exceptional Rent GrowthBooming tourism and rising retail spending are prompting expansion among local industrial tenants in Miami-Dade County. The current business cycle has fostered tremendous demand for product near major transportation routes and distribution hubs, with prime industrial submarkets such as Hialeah and Miami Airport posting sharp decreases in vacancy. Although the market has tightened considerably over the past several years, supply growth has remained consis-tently below net absorption during this time frame, prompting steady improve-ment in vacancy as tenants scoop up the dwindling number of spaces available. In addition, the new supply has been concentrated in Medley and the Miami Airport, easing pressure from surrounding submarkets and leading to substan-tial tightening as tenant influxes quickly filled dark spaces. A virtuous cycle of asking rent growth has occurred as a result of this environment, boosting prices per square foot more than $2 over the past two years, with the pace of appre-ciation accelerating meaningfully over the last four quarters. While development will reach the highest point in four years in 2016, the supply constrained market will still record a double-digit increase in the average asking rent for a second straight year.

A shortage of quality space amid historically low interest rates has sparked sig-nificant interest among buyers at all price points. While owner-users have been most active in the western portions of the metro where large floor plates are still available, individuals and syndicate buyers have concentrated the bulk of their activities in urban facilities, seeking to benefit from the surging growth in e-com-merce. Properties with modern facilities and amenities are the most in demand, garnering significant premiums to the metro average cap rate, which will typ-ically begin in the mid-6 percent range. More than two-thirds of transactions have been closed in Miami and Hialeah this year, underscoring the emphasis on urban core assets near major distribution centers and transportation routes. Older industrial spaces have been active as well, with new owners seeking to repurpose or redevelop the sites into other uses on some occasions in order to generate more robust cash flows.

2016 Market Forecast• Employment: Miami firms will hire 23,700 new employees this year, ex-

panding metro payrolls by 2.1 percent. In the prior four quarters, headcounts advanced by 22,600 places.

• Construction: Developers will complete 2.0 million square feet of industrial space in 2016, exceeding the 1.8 million square feet completed last year.

• Vacancy: Net absorption will keep pace with construction this year, keep-ing vacancy unchanged at 4.7 percent. In the previous 12 months, vacancy plummeted 110 basis points.

• Rent: After rising 11 percent last year, asking rents will climb 12.7 percent this year to $9.70 per square foot.

• Investment: Well-located facilities near major transportation routes will garner significant interest, particularly in urban areas near major population centers as e-commerce demand rises.

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E-Commerce Operators Acquiring Space For Quick Access to Tri-State MarketplaceBenefiting from the massive population centers in the tri-state area, Northern New Jersey industrial properties are in high demand. Owner-users, led by Ama-zon, have been steadily acquiring spaces left in the market, seeking to improve delivery times to the vast number of consumers within driving distance. Howev-er, the inability of developers to ramp up construction in core urban areas due to a shortage of available land has capped completions below 2 million square feet in every year of the current cycle except 2014. As a result, prospective tenants have been actively leasing properties, pushing the metro vacancy rate to the lowest point of the current cycle. During this period, net absorption has remained well ahead of supply injections, underscoring the immense demand currently in place in the market. Robust demand has spilled over into the rapid acceleration of average asking rents, which have shown positive traction for four consecutive years. Another year of benign construction, coupled with con-tinued strength in demand, will usher in the fifth straight year in 2016, with prices per square foot set to rise at a mid-single-digit rate.

As interest rates remain low and e-commerce proliferates, investors and own-er-users alike have been scooping up properties all over the Northern New Jersey metro area. The infill environment has significantly limited development, fostering a more aggressive pace of acquisitions over the past two years not witnessed in prior years of the cycle. As a result, prices per square foot have ac-celerated, with closed transactions and dollar volume setting new highs during this period. Rising prices have also compressed first-year returns, pushing cap rates into the low-4 percent range for credit tenants. Class B and C product, when available, will exchange ownership in the mid-6 to mid-7 percent range, depending on quality and location. Investors seeking value-add opportunities have been raising roof heights and redeveloping older product into spaces with modern amenities and features. A slow development pipeline will generate sig-nificant interest in existing spaces in 2016, fostering a robust investment market.

2016 Market Forecast• Employment: Northern New Jersey employers will hire 39,600 people this

year, expanding the employment base by 1.9 percent. In the previous year, 35,400 residents found jobs, a 1.7 percent gain.

• Construction: Builders will finish 1.87 million square feet of industrial space in 2016, up considerably from 410,000 square feet completed last year.

• Vacancy: Robust net absorption exceeding 3.4 million square feet of space will contract the metro vacancy rate by 80 basis points this year to 6.1 per-cent. In the previous yearlong period, vacancy fell 60 basis points.

• Rent: The average asking rent will advance 5.2 percent this year to $6.71 per square foot, exceeding the 4.8 percent rise recorded in 2015.

• Investment: Well-located properties with credit tenants will price at robust premiums to the metro average. Older, outdated industrial properties will be remodeled or repurposed in order to generate above-average returns.

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Orlando

Specialized Industry Owner-Users, Broad-Based Economy Spur Investor Moves

A robust tourism industry, coupled with a considerable concentration of com-puter simulation businesses, has led to tremendous demand for local industrial space in Orlando. The specialized spaces that these firms require has led to a pickup in development over the past few years, yet the building has been unable to quench demand for spaces as net absorption has exceeded supply growth in every year since 2009. The majority of construction over the current cycle has favored locations along Interstate 4 and Highway 408 that provide quick access to major metro thoroughfares and other distribution networks. While this year’s slate of projects will skew toward similar destinations, the amount of new supply will fall below the last two years, fostering another reduction in the metro vacan-cy rate. Tightening local operations have spilled over into robust average asking rent gains over the past two years yet asking rents still remain below the levels seen in the previous cycle peak, highlighting the potential for further appreciation as tenants scoop up the remaining properties. This will encourage another year of asking-rent appreciation in the high single digits, with vacancy tumbling to the lowest point of the current cycle.

Broad availability of commercial credit, coupled with continued low interest rates, is driving considerable interest in Orlando industrial assets. In addition to these factors, a diverse buyer pool has nearly pushed dollar volume above 2015 levels with several months remaining in the year, highlighting the acceleration in transaction velocity as market operations tighten significantly. The shortage of quality spaces has led to bidding wars in order to deploy capital for business expansion or investment income, compressing cap rates to the mid-7 percent range metrowide. Plummeting vacancy rates have also triggered a willingness to pay higher prices per square foot as well, pushing prices toward the mid-$60 per square foot range. Warehouses near transportation routes have garnered the majority of investor activity, accounting for nearly two-thirds of all closed deals year to date. A slower pace of development in 2016 will strengthen the conviction of buyers, while sellers will be reluctant to sell without first consider-ing refinancing assets and holding out for higher cash flows.

2016 Market Forecast• Employment: Orlando firms will hire 50,000 workers this year, expanding

payrolls by 4.2 percent and matching the amount of jobs created in 2015.

• Construction: Developers will complete 1 million square feet of industrial space this year, a modest slowdown from the 1.4 million square feet delivered in the prior four quarters.

• Vacancy: Net absorption will reach nearly 3 million square feet in 2016, prompting a 170-basis-point reduction in vacancy to 5.7 percent. Last year, vacancy fell 70 basis points.

• Rent: After rising 12 percent last year, asking rents will climb 7.2 percent this year to $5.50 per square foot.

• Investment: Modern spaces near transportation routes will generate multi-ple offers, led by owner-users seeking floor plates for expansion.

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Demand for Just-in-Time Delivery Heats Up Construction, Drives Buyers to PhiladelphiaPhiladelphia’s prime location with its proximity to the large population centers of New York City, Baltimore, Washington, D.C., and Boston has driven the need for the metro’s industrial assets. As a result, demand is rising for properties in nearby areas that allow faster delivery and include ceiling heights for taller auto-mation technology, triggering construction to a new high this year. The majority of development will be located within Burlington County, including a large 1.3 million-square-foot center in Bordentown. Vacancy in this county plummeted over the last four quarters as net absorption outpaced completions. Addition-ally, several companies, including Amazon and Samsung, have signed leases within the market for facilities of more than 500,000 square feet during the first half of the year. Metrowide, industrial vacancy fell notably year over year in the second quarter. Though demand is strong, the completions on track for delivery this year are not completely pre-leased as of midyear, keeping vacancy flat for the full year. Shifts into newer facilities with upgraded features will further drive the average asking rent up and it will reach a new cycle high.

Philadelphia’s improving economic outlook and relatively low interest rates are attracting both local and out-of-state investors to the area’s industrial assets. Trading volume has continued its upward pace as buyers snatch up warehous-ing and manufacturing facilities metrowide. In particular, properties in the west-ern and eastern suburbs along major transportation routes were of significant interest to buyers. Here, the average first-year return ranged from the low-5 to mid-7 percent range based on size, building class and location. Owner-users are also are active, seeking assets to expand their presence in the region as property values continue to rise steadily. Several investors are acquiring indus-trial facilities with plans to renovate and lease the properties for additional cash flow while debt remains inexpensive.

2016 Market Forecast• Employment: After hiring 48,200 workers in 2015, Philadelphia employers

will create 58,000 positions this year, a 2.0 percent payroll expansion.

• Construction: Developers are on track to complete 6.4 million square feet of industrial space this year, a significant increase from the 2.7 million square feet that was finalized in 2015.

• Vacancy: The vacancy rate will remain flat this year at 9.1 percent, after falling 70 basis points last year on net absorption of 5.3 million square feet.

• Rent: Healthy demand for industrial space will drive the average asking rent up 4.8 percent in 2016 to $4.80 per square foot. In the previous year, rent ticked up 1.3 percent.

• Investment: Warehousing and manufacturing facilities within the suburban Philadelphia area, particularly along high-traffic routes, will continue to pique buyers’ attention.

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Steady Recovery Drives Industrial Demand In the Valley, Boosts Investor InterestThe growing local economy has lifted household incomes and spurred retail sales, driving demand for industrial space in Phoenix. As consumer spending power increases, along with the growing interest for e-commerce, warehousing and distribution facilities are being snatched up across the Valley to meet retail-ers’ needs. Nestle Water recently penned a nearly 400,000-square-foot lease in the Southwest submarket. Additionally, construction is expected to continue its heightened pace with approximately 5.8 million square feet on track for de-livery this year as companies such as REI expand in the Valley. Development will be widespread, with several larger projects coming to fruition in the Tolleson, Chandler/Gilbert and Glendale submarkets. Despite construction remaining above the previous five-year average, net absorption will outpace completions, pushing vacancy down to the lowest rate of this cycle at year end. As vacancy tightens and market demand remains healthy, the average asking rent will rise for the fifth consecutive annual period.

Investor interest for the Valley’s industrial assets is gaining steam as market operations improve, amplifying the number of transactions approximately 20 percent over the last four quarters. Out-of-state buyers, primarily from California metros, are significantly increasing their presence in the area as they search for higher-yielding properties. Warehouse facilities near major transit routes in the Southeast and Northwest submarkets are garnering much of buyers’ at-tention, along with space near Phoenix Sky Harbor International Airport. The average first-year return has remained relatively steady over the past 12-month period, hovering around the high-7 percent range. Property values continue to rise, climbing 14 percent year over year to nearly $80 per square foot in June, with several well-located flex facilities trading at or above $150 per square foot during this time period.

2016 Market Forecast• Employment: Phoenix employers will increase payrolls by 2.9 percent this

year with 56,000 positions. In 2015, establishments created 72,000 jobs, a 3.8 percent expansion.

• Construction: After completing 5.9 million square feet in 2015, developers will add 5.8 million square feet of industrial space to inventory this year.

• Vacancy: As net absorption will slightly outpace completions this year, the vacancy rate will tick down 20 basis points to 10.4 percent. Last year, vacan-cy plummeted 110 basis points.

• Rent: The average asking rent will rise 1.7 percent this year to $6.71 per square foot after generating a 3.3 percent increase in 2015.

• Investment: Industrial assets along major highways will be highly sought after by investors seeking to enter the market. Facilities located within the Southwest submarket will garner attention from value-seeking buyers.

PhoenixS

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Metro United States

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Accelerated Hiring and Robust Operations Fuel Demand for Industrial Assets A rise in U.S. imports and demand for e-commerce bode well for industrial operations in the Riverside-San Bernardino metro. Vacancy has been cut in half since its 2009 peak as the 65 million square feet built over the same time period was quickly absorbed. Strong absorption will continue as Wal-Mart recently penned a 640,000-square-foot lease in the new Goodman Logistics Center in Fontana and Amazon announced plans for a new 1.1 million-square-foot fulfillment center in San Bernardino. Tight market conditions have supported double-digit year-over-year rental growth during each of the past five quarters. Tenant demand has heightened the pace of construction as deliveries reach a cycle high. The bulk of the development will be widespread, with significant completions in the areas of Fontana, Ontario and Rialto. As this new space enters a period of lease-up, the market’s average vacancy rate will edge up this calendar year. Yet, as vacancy remains relatively tight, average asking rent will register a mid-single-digit percent increase.

Historically low interest rates and relatively strong market operations in the In-land Empire are motivating investors to scoop up properties along major transit routes that lead into Los Angeles and Orange County. In particular, buyers are significantly active in the areas of Corona, Ontario, Rancho Cucamonga and Riverside where warehousing facilities are garnering investors’ attention. Trans-action velocity has risen notably over the last 12 months, compressing the aver-age first-year return nearly 100 basis points to the high-5 percent range. Assets located farther east in San Bernardino traded with cap rates approximately 200 basis points higher than the metro average, attracting several yield-seeking in-vestors. The intense bidding environment over the last four quarters has pushed the average sales price up significantly. Assets farther east will continue to lure buyers with lower-entry costs and potential value-add opportunities.

2016 Market Forecast• Employment: Establishments in the Inland Empire will hire 43,000 workers

this year, a 3.1 percent payroll expansion. Last year, approximately 47,800 positions were added.

• Construction: Developers will complete 21.6 million square feet of indus-trial space this year, matching the number of deliveries in 2015.

• Vacancy: Net absorption of 16.4 million square feet of space will increase vacancy 80 basis points in 2016 to 6.2 percent. Last year, the rate remained flat at 5.4 percent.

• Rent: After rising 10.3 percent last year, the average asking rent will move up 6.4 percent this year to $5.68 per square foot.

• Investment: Warehouse assets, primarily along major thoroughfares to the larger West Coast metros, will continue to pique investor interest. The intense demand will place further downward pressure on returns.

Riverside-San Bernardino

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$64

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A Surge in Construction Can’t Keep Up With Demand; Vacancy Remains Near 10-Year LowThe metro’s surging population base and the growth of e-commerce are gener-ating a substantial need to store more consumer goods close to where people live. As a result, demand is rising for smaller facilities close to the urban core to facilitate same-day deliveries as well as large warehouse and distribution space on the outskirts of the metro. The sizable need for space boosted inventory additions to a five-year peak in 2015, yet vacancy remains near the decade low. The tight vacancy rate will likely green light more speculative projects in the quarters ahead as developers struggle to keep up with the robust need for space. The lack of developable land in some areas of the metro, however, is driving up land prices and the cost of construction, pushing development farther from the core. The need for industrial space is especially acute in the city of Se-attle where little new inventory has been added and many obsolete buildings are being demolished, keeping vacancy around 2 percent. Metrowide, demand has driven the average asking rent in June to within 3 percent of the 10-year peak.

Seattle-Tacoma’s booming economy is luring capital from around the globe. Buyers are seeking safety in the metro’s industrial assets. A lack of available listings, however, has increased the number of unsolicited offers. Newer build-ings in the Kent Valley are drawing REITs and institutions to the south end of the metro. Here cap rates for stabilized properties typically start below 6 percent but can dip lower for premier buildings. At the north end of the region, a new ter-minal at Paine Field in Everett that is expected to bring commercial flights to the facility in late 2017 and the redevelopment of Port of Everett’s Waterfront Place will likely draw additional industrial users and buyers to Snohomish County. Cap rates there average in the 6 percent area. Throughout King County, many old-er industrial areas are being targeted for redevelopment. Functionally obsolete buildings along major transit routes that can be repurposed will generally trade at attractive cap rates.

2016 Market Forecast• Employment: Metro employers will generate 57,750 new positions during

2016, a growth rate of 3 percent. This mirrors last year’s 3 percent gain.

• Construction: After peaking at a total of 4.5 million square feet last year, developers will complete 3.15 million square feet in 2016. The Puyallup/South Hill submarket will receive more than 60 percent of this year’s new inventory.

• Vacancy: Slowing in the construction pipeline amid strong leasing activity will result in vacancy falling 30 basis points to 4.2 percent in 2016, the tightest rate since 2007. Last year, vacancy remained steady at 4.5 percent.

• Rent: Asking rents will increase 5.9 percent to an average of $7.51 per square foot in 2016, just 2.3 percent below the 2008 peak. Last year, a 4.4 percent hike was recorded.

• Investment: The redevelopment of industrial sites along Interstate 5 with access to Seattle-Tacoma International Airport as well as ports in Seattle and Tacoma will keep REITs and institutional investors active in South King and Northern Pierce counties.

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Industrial Developers Ramp Up; Local Investors Chasing Higher Yields in San DiegoHealthy property operations and strong absorption trends over the past few years have prompted developers to move forward with industrial projects in San Diego this year. Completions will rise significantly from 2015, and builders are focusing heavily on the northern portion of the metro, where nearly 1 million square feet of space is set to be delivered in the final half of the year. Positive net absorption over the past several years has pushed the vacancy rate down more than 600 basis points since peaking in 2010. Though supply additions will slightly outweigh demand, strong pre-leasing activity will keep the rate his-torically low the remainder of this year as the vacancy rate realizes the first an-nual uptick since the third quarter of 2010. Softening conditions will be largely localized in the North San Diego submarket as builders bring several projects online, and operations will continue to tighten in other areas, such as the South Bay and the Interstate 5 and Interstate 15 corridors, where little new inventory is slated for completion this year and space demand is strong.

Capital is flowing into the San Diego industrial market as investors search the metro for higher yields than those found in other Southern California markets. Local buyers remain the main player, chasing assets priced between $1 million and $5 million over the last year. Those with some value-add component are particularly in high demand, and assets located along the Interstate 15 corridor can be re-tenanted at higher rental rates. Properties located in the South Bay will remain in high demand, driven largely by the shipbuilding and repair industry, which will underpin healthy operations in the area over the months to come. Warehouse and manufacturing space accounts for a large share of transactions in the metro, with cap rates compressing approximately 50 basis points for each property type over the last year. On average, warehouse assets draw initial yields near 6 percent, while manufacturing properties trade at first-year returns closer to the mid-6 percent area.

2016 Market Forecast• Employment: San Diego employers will add 34,000 workers in 2016, ex-

panding headcounts 2.4 percent annually. Last year, the local workforce grew 2.9 percent with the addition of 39,600 jobs.

• Construction: Following the completion of nearly 240,000 square feet of industrial space in 2015, builders will deliver 1.9 million square feet of space in the metro this year.

• Vacancy: Vacancy will rise 30 basis points from the end of 2015, pushing the rate up to 5.8 percent by year-end. Last year, the vacancy rate declined 180 basis points.

• Rent: Tight conditions will foster healthy rent gains this year and the average will rise 3.9 percent year over year to $11.90 per square foot by year-end. In 2015, the average grew 3.0 percent.

• Investment: Buyers in search of stabilized, flex spaces will focus on the La Jolla area, near the University of California, San Diego, as growth in the biotech sector supports further improvement in flex space operations.

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Tampa-St. Petersburg

Conditions Tighten in Tampa Amid Limited Industrial DevelopmentThe Tampa-St. Petersburg industrial market is thriving, buoyed by strong activity at Port Tampa Bay. Construction has been scarce over the past few years, and industrial users expanding in the market have been pushed into existing buildings, facilitating a 670-basis-point drop in the vacancy rate over the past six years. Distribution and warehouse facilities located near the port are in high demand, and industrial growth along the Interstate 4 corridor running between Tampa and Orlando is expected to rise exponentially over the next several years. As a re-sult, the majority of building activity is located just outside the market along this stretch of highway. Wal-Mart and FedEx are expanding distribution facilities, and speculative space targeting e-commerce and consumer goods users is under-way. While developers remain largely focused on adding space just outside the market, those seeking space closer to the port and in stabilized industrial parks will target existing buildings, pushing the vacancy rate below 6 percent for the first time since 2007 and encouraging healthy rent gains this year.

The Tampa-St. Petersburg industrial market’s healthy operations continue to attract buyers to the market, lifting prices and compressing cap rates so far this year. The opening of the Panama Canal prompted the addition of larger cranes at Port Tampa Bay earlier this year as officials expect to capitalize on increased container traffic to the state. Plans for a cold-food storage facility are underway, and officials are also exploring opportunities to lure new car imports from Mexico as nearby ports that currently accept these imports will see a boost in large container ships. An increase in port activity will bode well for industrial properties nearby and attract a range of buyers for investment opportunities in the area. So far this year, warehouse assets are in highest demand, and those priced between $1 million and $5 million are leading trade activity in 2016. These buildings typically change hands at an average initial yield in the high-6 percent to low-7 percent range. Buyers are also targeting properties located in Pinellas County, which typically trade at prices below the market average and at cap rates near 7 percent.

2016 Market Forecast• Employment: Tampa employers will create 38,000 jobs this year, expand-

ing headcounts 3.0 percent annually. In 2015, approximately 46,000 posi-tions were added to local payrolls.

• Construction: Completions will rise from last year as builders add 630,000 square feet to inventory during 2016.

• Vacancy: Healthy demand for space will keep vacancy on a downward trajectory, falling 80 basis points from the end of 2015 to 5.8 percent. The rate declined 140 basis points last year.

• Rent: The average asking rent will rise 3.4 percent year over year to $5.18 per square foot by year-end. In 2015, the average increased 4.6 percent.

• Investment: Healthy operations and demand for space along the Inter-state 4 corridor are attracting investor interest, and owners in search of deals will find properties changing hands in the low- to mid-7 percent area.

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E-Commerce Drives Space AbsorptionNear Airport and SuburbsA booming labor market that has pushed payroll expansion to the highest level in nearly a decade is driving considerable improvement in the Washington, D.C., metro industrial market. A more robust pace of job creation has given way to significant growth in retail sales. The proliferation of e-commerce has prompted retailers and other operators to migrate toward quicker delivery times, favoring industrial assets in core urban areas near large population centers. The resulting environment has fostered significant vacancy reduction in the metro, led by infill submarkets where development is highly constrained. The limited availability of land in the urban core has pushed the vast majority of industrial construction to the outer suburbs in Maryland and Virginia. The Dulles Corridor will receive the largest supply injections this year, with smaller properties set for delivery in Frederick and Prince George’s counties. While the level of development will be roughly in line with last year, continuous deliveries in key submarkets are begin-ning to weigh on the pace of net absorption, which will trigger a meager uptick in vacancy this year as new properties are leased up. However, rent growth will continue unabated as relatively tighter operations feed through into greater demand for existing spaces, allowing the average asking rent to keep up with inflation over the same period.

Well-located industrial properties have been in high demand as investors seek out higher rates of return due to historically low interest rates. While the pace of transactions has soared, dollar volume has remained below prior years in the cycle due to the quality and location of properties that are exchanging owner-ship. Transactions in prior years were dominated by infill properties near major population centers, while the environment of late has shifted to favor suburban stock with value-add opportunities through redevelopment or repurposing of the space for different uses. Metrowide, cap rates will average in the mid-6 per-cent to low-7 percent band, depending on location and asset quality. A higher pace of development may bring out more sellers in 2016, sponsoring additional gains in transactions.

2016 Market Forecast• Employment: Washington, D.C., metro firms will hire 85,000 new workers

this year, a 2.7 percent rate of growth. This is a robust upswing from the 68,500 staffers added to payrolls in the previous year.

• Construction: Builders will finish 3.5 million square feet of industrial space this year, roughly in line with deliveries in 2015, when 3.4 million square feet was brought to market.

• Vacancy: Net absorption of 2.96 million square feet will foster a 10-ba-sis-point rise in vacancy to 8.3 percent. Last year, vacancy fell 80 basis points.

• Rent: The average asking rent will rise 2.5 percent this year to $7.85 per square foot, far outpacing the 0.4 percent decline recorded in the prior year.

• Investment: Urban assets near major population centers will exchange ownership at a significant premium due to the lack of space available in these areas. The majority of dollar volume will be placed in suburban locales.

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Note: Employment growth is calculated using seasonally adjusted monthly averages. Employment and industrial data forecasts for 2016 are based on the most up-to-date information available and are subject to change. Sales data includes transactions valued at $500,000 and greater unless otherwise not-ed. The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete informa-tion; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Moody’s Anlaytics; Port Authority of New York and New Jersey; The Port of Los Angeles and Real Capital Analytics.

National Office and Industrial Properties Group

Alan L. PontiusSenior Vice President, National DirectorTel: (415) 963-3000 | [email protected]

For information on national industrial trends, contact:

John ChangFirst Vice President | Research ServicesTel: (602) 687-6700 | [email protected]

Jay LybikVice President | Research ServicesTel: (602) 687-6818 | [email protected]

Price: $1,500

© Marcus & Millichap 2016 | www.MarcusMillichap.com

15 16* 15 16* 15 16* 15 16*

Atlanta 2.8% 2.9% 10,903 19,930 7.3% 7.4% $3.74 $3.96

Charleston 3.1% 3.0% 2,200 1,800 7.4% 7.7% $5.39 $5.48

Chicago 1.4% 1.3% 17,350 15,725 7.1% 6.2% $5.27 $5.55

Cleveland 1.2% 1.3% 1,160 1,500 5.4% 4.5% $3.76 $3.90

Dallas/Fort Worth 3.8% 3.0% 18,130 25,570 7.2% 7.3% $4.60 $4.75

Denver 2.7% 2.8% 1,030 3,700 4.0% 4.3% $7.31 $7.90

Detroit 1.8% 1.9% 2,400 2,000 5.2% 4.0% $4.60 $4.80

Houston 0.7% 0.2% 12,750 15,200 4.8% 6.0% $6.65 $6.70

Indianapolis 2.5% 1.5% 6,910 1,650 7.7% 5.8% $3.70 $3.85

Los Angeles 2.7% 2.0% 2,990 4,400 2.0% 2.2% $8.70 $9.31

Miami-Dade County 2.0% 2.1% 1,840 2,000 4.7% 4.7% $8.61 $9.70

Northern New Jersey 1.7% 1.9% 410 1,870 6.9% 6.1% $6.38 $6.71

Orlando 4.4% 4.2% 1,430 650 7.4% 6.6% $5.13 $5.68

Philadelphia 1.7% 2.0% 2,700 6,400 9.1% 9.1% $4.58 $4.80

Phoenix 3.8% 2.9% 5,950 5,800 10.6% 10.4% $6.60 $6.71

Riverside-San Bernardino 3.6% 3.1% 21,590 21,600 5.4% 5.5% $5.34 $5.68

San Diego 2.9% 2.4% 240 1,900 5.5% 5.8% $11.45 $11.90

Seattle-Tacoma 3.0% 3.0% 4,530 3,150 4.5% 4.2% $7.09 $7.51

Tampa-St. Petersburg 3.7% 3.0% 370 630 6.6% 5.8% $5.01 $5.18

Washington, D.C. 2.2% 2.7% 3,400 3,500 8.2% 8.3% $7.66 $7.85

U.S. Metro Total 2.0% 1.5% 172,320 190,000 6.3% 5.9% $6.00 $6.30

Metro Employment Growth

Completions (000s of Sq. Ft.)

Vacancy (Year-End)

Asking Rent per Sq. Ft.

Statistical Summary

* Forecast

Prepared and edited by

Art GeringSenior Analyst | Research Services

Jessica HillMarket Research Analyst | Research Services

Aaron MartensResearch Analyst | Research Services

Nancy OlmstedSenior Market Analyst | Research Services

Catherine ZelkowskiResearch Associate | Research Services

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