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Sunday, December 21, 2014

Strong National Demand and Shortage of New Construction Push Industrial Sale Volume and Pricing into 2015

by Erik Foster (Chicago)

The US outlook for industrial capital markets remains strong as we approach year-end.  The investor demand continues to outpace supply of assets coming to market. While we have seen a return of speculative construction in many of the major and secondary markets, it has not filled the void quickly enough from the leasing perspective as many markets are reaching historically low vacancy rates.

Among the key trends to look for in 2015 are:

  • Look for a three to seven percent increase in pricing for industrial assets in many markets nationally as supply continues to lag behind demand. While there is more than 100 million square feet of speculative construction underway in the top 30 markets nationally, there can be a 12 to 18 month lag time for construction, leasing and potential investment activity.  As the fourth quarter push in 2014 to get leases done will benefit the market overall, there is still significant demand from tenants.
  • There will be a sustained demand in secondary markets, such as Indianapolis, Columbus, Miami and Charlotte.  Trends such as this will continue to provide positive leasing, and consequently sales momentum, into 2015.  This is due to a shortage of core product and more favorable pricing in secondary markets.  Some of these markets, such as Seattle, are reaping aggressive pricing at peak levels, yet the development pipelines in some of these supply constrained markets will continue to push rents and per square foot prices past the historical market highs.
  • The growth in equity from Canada, South Korea, Germany, the United Kingdom and other Western European countries will continue at a brisk pace.  International investors are particularly focused on the U.S. market, as it offers tremendous stability and growth potential.  Given the different vehicles that are now available for investors to access the industrial marketplace from across the world, there will be sustained interest in US industrial product from capital sources that we have not historically seen.  More, and different, equity will continue to put demand side pressure on pricing keeping overall cap rates at, or in some markets beyond, current levels for the best product.  This demand will continue to keep upward pricing pressure on industrial assets in secondary markets as well.

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