Robust Industrial Market Ahead for Much of North America
- Jun 10, 2014
The North American industrial sector offers much to cheer and a few reasons for caution, according to experts at I.CON, an international conference organized by NAIOP on Thursday in Jersey City, N.J.
“We have had a tremendous ride,” said Rene Circ, director of industrial research for PPR/CoStar. Sixteen consecutive quarters of positive net absorption, on top of a dearth of new construction, has reduced the vacancy rate in the United States from 13.4 percent to 9.2 percent. That ride should continue for a while longer; PPR/Costar’s current forecast calls for another five or six quarters of net absorption that will shave 50 points off the vacancy rate. In contrast to the previous growth cycle, which was driven primarily by China, the rise of e-commerce is the predominant factor in today’s expansion, Circ added.
Through 2018, the PPR/CoStar forecast indicates that U.S. industrial rents will reach unprecedented levels. Meanwhile, although speculative construction has returned, today’s development pipeline of 110 million square feet is only about 60 percent of the typical 160 million to 170 million square feet of new product. These trends are also affecting asset values. Cap rates average about 7 percent overall, and in an increasing number of markets, rates for Class A industrial properties hover around 4 percent, Circ said, “and that we have never seen before.” Buying Class A properties for below replacement cost is difficult, he noted; meanwhile, Class B assets are trading for about 8 percent below replacement cost. Warehouse portfolios are commanding a premium of 15 percent, up from 10 percent in 2006-07.
Robust growth in Mexico’s nearly $1.2 trillion economy is creating vibrant opportunities for industrial developers and investors, said Gary Swedback, president of NAI Mexico. “We’re seeing vacancy rates between 5 percent and 10 percent” in most of the nation’s industrial markets, he reported. Swedback cited the nation’s vast natural resources, deeply integrated economy and $10,000 per capita income. “Don’t forget the inland ports, or the rail systems that connect” Mexico, the U.S. and Canada,” he added. He noted that Mexico is launching what is expected to be a 10-year run of domestic and foreign investment.
Swedback detailed the global investment that is validating Mexico’s growing maturity as an economy and as an industrial market. Nissan, General Electric, Honeywell and 3M are all developing research and development facilities in Mexico. Since 2012, Nike, Jabil and 3D Systems have all relocated operations from China to Mexico. Key areas for industrial real estate investment include such border areas as Tijuana, Juarez and Reynosa, as well as Monterrey (“the Chicago of Mexico,” as Swedback described it, as well as Mexico City, the world’s third largest metropolis.
Canada presents steady, if more modest potential for industrial development and investment. Construction costs are rising faster than rental rates, few merchant builders are developing new product, and institutional investors are pursuing local positions, explained Gordon Cook, executive vice president for Colliers International. “Cost constraints are generally holding back development across our country,” he said. Cook called the Calgary/Edmonton industrial market “our shining star,” thanks largely to a 3.5 percent GDP growth rate.