Industrial Buildings: Out with the Old, in with the New

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By: Amber Schiada, Vice President & Director of Research

The industrial real estate market looks set to enjoy another great year in 2016.

Nationally, vacancy in warehouse-distribution, manufacturing and other industrial buildings was just 6.2 percent in Q1, which is 1.2 percent lower than it was in the last cycle (2008).  Between 2014 and the first quarter of 2016, net absorption of industrial real estate was 56.1 million square feet (MSF) nationally.  Even with 131 MSF of new construction coming online this year, we could maintain a vacancy in the low 6 percent range into 2017.

That’s good for rents. Rental rates for warehouse buildings are expected to rise 4.5 percent nationally this year, the sixth consecutive year they have increased.

Much of the space under construction by industrial developers like Newport Beach-based Panattoni Development and is being built speculatively.  The reason for this is that demand for efficient, modern industrial space is at an all time high. More than half of the 1,852 blocks of industrial space over 100,000 s.f. available nationally at the end of the first quarter were mid-1980s vintage or older.

Space is particularly tight in the Bay Area. In Silicon Valley, many older industrial buildings have been removed from inventory as growing tech firms have snapped up space for future operations.  One of the few modern buildings currently under construction in that market – Silicon Valley Industrial Center in South San Jose – will deliver 111,000 s.f of much needed space to the market later this year.  Even in traditional distribution markets like the I-80 corridor between the Bay Area and Sacramento, space is tight. Earlier this month, Panattoni broke ground on over a million square feet of premier distribution space close to I-80 in Fairfield, Calif.

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