US INDUSTRIALS READY FOR ANOTHER RECORD

This winter’s extremely cold weather pushed down the nation’s GDP in the first quarter, and worries over the financial troubles of the euro may have clouded some economic forecasts, but through it all the US industrial economy kept chugging along, and seems set to far surpass last year’s robust level of absorption.

According to a just-published analysis of the second quarter by DTZ, industrial users were responsible for 46.1 million square feet of net absorption, bringing the mid-year total to 86.5 million square feet, a 22% increase over where the market was last year at this time. Furthermore, US industrial vacancy now stands at just 7.3%, the lowest rate since before the recession. DTZ studied 60 markets for its analysis and found 19 with vacancy rates below 5%.

Much of the strength of the modern industrial economy comes from the desire of consumers for ever-quicker deliveries and the subsequent expansion of the supply chain system. And DTZ researchers say that in May consumers increased their spending by 3.4%, the biggest jump since October 2006, helping to further boost the supply chain infrastructure.

“With current gas prices roughly $1 per gallon lower than a year ago, we expect consumer spending to continue to grow at a strong pace,” DTZ says. “That will fuel even greater demand for goods and for warehouse space.”

The numbers show a broad-based expansion. Only 17% of the markets studied by DTZ did not see any absorption. Still, it was the hubs for distribution that once again led the way. Since 2014, one-third of all absorption has taken place in just five markets—Atlanta, Inland Empire, Dallas, Houston and Phoenix. And the top ten markets accounted for about half of all absorption.

“The second quarter data also revealed that tenant demand is spreading beyond modern bulk warehouse space and into smaller, lower-quality product,” DTZ found. That strengthening demand is also pushing up rental rates for smaller buildings, those between 10,000 square feet and 50,000 square feet, in the top markets faster than in larger buildings. “The “mom-and-pop” and traditional tenants that fill these buildings are an important undercurrent in the industrial market as they pave the way for new development.”

And developers have begun to rapidly expand their activity. In the first quarter developers had 107.3 million square feet under way, and by the second quarter increased that to 122.3 million square feet. So far this year developers have delivered 72.8 million square feet, a significant increase over the output in the first half of 2014, when 47 million square feet were delivered.

“At this current rate, all new space could be absorbed within three quarters,” DTZ believes, calming any fears about overbuilding. “Even as the development pipeline hits the market, we anticipate vacancy will continue to tighten through 2016.”