The market for South Jersey industrial space, along with other key distribution markets in the U.S., is in line to benefit significantly from escalating demand for new, bulk warehouse space, the CoStar Group reports.
The only thing hampering investor demand for warehouse and logistics properties is the existing shortage of new, modern buildings for investors to buy,” CoStar’s top analysts said at the recent Fourth Quarter Industrial Real Estate Review and Outlook.
With rental rates rising, particularly rates for new, high-quality logistics space, major markets, such as the market for industrial space in South Jersey, can support the construction of new buildings leased to good credit tenants for potentially 10 years.
“This is as good a time in industrial real estate as you could possibly imagine,” declared one analyst, while another noted that “It’s a great time to own industrial real estate.”
Even with a veritable absence of available properties, sales of institutional grade properties are the strongest ever in terms of sales volume and square footage traded, one analyst noted.
Capitalization rates were a record low of less than 6% for institutional properties, the analyst said, and there have been even lower cap rates available for sales of big box warehouse space leased to triple-net credit tenants in the best markets.
As competition increases among investors who want to jump into the industrial real estate market — including the South Jersey industrial space market — 2014 investment sales in the industrial sector were up a significant 8% to $60 billion.
Despite investor’s vigorous interest in industrial properties, including industrial space in South Jersey, sales of industrial space trailed multifamily, office and retail property sales, again because of the absence of enough properties to sell to investors. Although construction of bulk warehouse space is increasing, it is not yet sufficient to meet investor demand for those modern facilities tenants desire for their continually more sophisticated and high-tech logistics supply chains, CoStar said.
CoStar compared inventory of new logistics buildings (five years old or less) with existing logistics buildings and found that both the supply of newer buildings and the ratio of sales decreased significantly since 2002, when 32% of trades were for newer buildings compared to only about 10% today.
The shortage of new construction is suppressing sales by up to 10 percentage points and prices for buildings now on the market are being bid up because there are not enough sellers, an analyst explained.
The soaring demand for newer, higher-functioning industrial properties has caused a flip-flop in the performance of the various commercial real estate sectors. Rents for industrial space grew 4.5% in 2014, while the rental rate increase rose at healthy but slower paces in the usually more attractive sectors: 3.7% in the office space market, 3.2% in the apartment sector, and 3% in retail space.
Available space in the market continued to tighten, marked by an 8.7% vacancy rate for logistics space in fourth quarter 2014 in comparison to the 9.9% vacancy rate experienced in 2007 at the height of the last real estate cycle. Absorption reached 167 million square feet in 2014, slightly lighter than it was in 2013, again because of the lack of usable vacant space, one analyst said.
Logistics construction was up 14% in 2014 to 136 million square feet, but was still down about 44 million square feet from a peak of 180 million square feet in the early 2000s, according to CoStar.
The recovery in rents and property values for the high-quality logistics sector is about completed, but expansion in the light industrial property sector is just beginning, the analysts said, noting only minimal new construction in this segment. That should ramp up in the upcoming quarters, they noted, calling it “very promising” since it is a sign of the strength of local economies.
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