"In 2015, rents and sale prices in many U.S. industrial property markets exceeded historical peak values last seen in 2007 and 2008," explains Craig Meyer, president, Industrial Brokerage, JLL Americas. "Market conditions will remain strong and we see no sign of a change in the coming months. Instead, all indicators point to demand again outpacing supply in 2016 with a continuing drop in vacancy rates to new all-time lows."

Many industrial developments are pre-leased before ground is even broken and speculative construction is being leased up. These large buildings leased to credit tenants on long-term leases are highly attractive to global investors that are interested in safe and stable property investments.

Global investors – sovereign wealth funds, institutional advisors and insurance companies – have taken billion-dollar positions in U.S. industrial portfolios over the last two years and continue to have an appetite for investment grade properties. Increasing demand across the U.S. is pushing lease rates and building values higher.

Follow the (offshore) money

Once unable to allocate enough funds into individual industrial real estate, global investors are now competing for the best industrial deals across the country, as sizeable portfolios that have been built or aggregated over the last five years have traded hands. Offshore capital has been the biggest participant in 2015’s race for U.S. industrial property investment, accounting for more than $11.5bn in total investment at the end of the third quarter, according to JLL research.

Global Logistics Properties’ recent $4.55bn portfolio acquisition of Industrial Income Trust, following its acquisition of IndCor in 2014 for $8.1bn, has propelled it to the second-largest runner of U.S. industrial properties. This illustrates that ownership of industrial real estate is being consolidated in the hands of increasingly fewer buyers, many of them now from outside the U.S. Continued acceleration in foreign direct investment into the industrial segment as equity partners are sought to recapitalize the enormous portfolios acquired in 2015.

“We see this trend set to continue well into 2016, as the occupiers of much of these portfolios are high-credit, national or multinational corporations that provide stability and secure returns over long investment hold periods” said Meyer.

Panama Canal changing the game

Anticipation of the long-awaited Panama Canal expansion opening is expected to continue to influence long-term changes in global supply chain dynamics. Many ports have already invested heavily in their infrastructure—with ports in the Eastern U.S. expected to benefit most from Panama Canal expansion over the next decade, especially in seaport markets with the best connectivity to major metropolitan population hubs throughout the country.

“Logistics companies will favor ports with intermodal options to meet flexibility, cost and service requirements to bring products in by ship and transfer to rail or truck to their final destinations,” said Meyer.

Shaping deliveries in the last mile

As continuing e-commerce competition and pressure from consumers for same-day or even same-hour delivery continues, urban logistics has come to the forefront. Major retailers are finding the need to establish more efficient and effective facility footprints— with some sites now also doubling as retail stores—in urban locations close to their customer base despite more expensive infill rents, in order to meet service-level expectations.

“In 2016, companies must calculate whether the high cost of instant gratification translates into higher sales and profitability,” said Meyer. “More than one large retailer has paid higher “office-level” rents to create a network of urban warehouse/retail centers with proximity to consumers and hubs for FedEx, UPS and USPS.”

Over and above the impact of e-commerce alone, the industrial market in the United States continues to fire on all cylinders. In fact, in the third quarter of 2015, more than 170 million square feet of industrial space was under construction, up almost 20 percent from the same time last year.  Many large occupiers are driven into new development for lack of quality, existing space options. JLL’s third quarter 2015 U.S. Industrial Outlook report shows that current and projected demand is approximately double that of speculative construction now under way. The report anticipates that net absorption will surpass new completions for the sixth consecutive year in 2016.

“The major industrial hubs throughout the United States, like Chicago, Central Pennsylvania, the Inland Empire, Dallas and Atlanta, have seen a significant increase in industrial development,” added Meyer. “As e-commerce volume is expected to more than double, companies will need to build new efficient warehouses and expand their industrial footprint deeper into urban locations in order to support customer demand for one-day or same-day deliveries.”

Source: JLL