Construction Not Keeping Up with Demand in Light Industrial Market
While huge warehouse and distribution mega-boxes get most of the attention from analysts and institutional capital, the unassuming light-industrial market in U.S. commercial properties has quietly emerged as the sleeper in today’s red-hot U.S. industrial market.
At midyear, the overall industrial sector, including industrial space in Philadelphia, led all major commercial property types in growth of investment sales and rental rate appreciation. The light industrial and manufacturing subtype between 100,000 to 300,000 square feet in the U.S. commercial real estate market boasted the highest year-over-year rent growth of any property type at 5.7%, compared to 5.4% for logistics buildings, 4% for office and 3.9% for apartments.
In fact, U.S. light industrial and Philadelphia industrial space are so hot that even older, lower-functioning buildings — many located on infill properties in supply-constrained markets — posted annual rent growth of 6.1%, the strongest rent growth within the entire industrial spectrum, according to a report from The CoStar Group that is being shared by Wolf Commercial Real Estate, a leading Philadelphia commercial real estate brokerage firm.
Another reason for the spiking rents is that the both the U.S. light industrial and the industrial space in Philadelphia sectors have seen little growth in new supply in the current cycle. Most big-name capital sources remain focused on acquiring and developing mega-logistics properties when searching U.S. commercial real estate listings. These properties are capturing the bulk of industrial net absorption, fueled by the so-called “Amazon effect” of e-commerce as retailers reconfigure their supply chains around same-day or next-day shipping.
Investors may finally be ready to take another look at light industrial development in U.S. commercial properties. As rents for these smaller buildings have ticked up, replacement rents now appear to be high enough in many markets to justify new construction.
“Finally, light industrial development is starting to pencil out,” said Rene Circ, CoStar Director of Research, Industrial Property who prepared the report that was shared with Wolf Commercial Real Estate, a top Philadelphia commercial real estate brokerage firm. “The tenants are there, the economy is fine, but the space is not.”
Replacement rents for both national industrial space and industrial space in Philadelphia have been high enough to support construction of larger warehouse and distribution properties in U.S. commercial properties for several quarters, and developers have heeded the call. While maintaining a measured pace of development in most markets, logistics construction last year finally passed the average of 120 million square feet under construction annually during the previous expansion cycle between 2002 through 2007.
That said, light industrial construction involving U.S. commercial real estate listings has remained stubbornly below its previous cycle average of 40 million square feet under construction annually.
“It’s very unusual for industrial to post this kind of rent growth and beat out the office and multifamily sectors,” Circ said in his report on national and Philadelphia industrial space that echoes the beliefs of the local market experts at Wolf Commercial Real Estate, a highly respected Philadelphia commercial real estate brokerage firm.
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