With almost one month of 2018 in the books, we thought this would be an appropriate time to look forward and shed some light on what we believe the 2018 industrial real estate market will look like.
Let’s start with the leasing market. 2017 delivered 2.9 million square feet of new product, and we finished the year with an overall vacancy rate of 4.5%. Many of these projects were developed to be able to accommodate the 30,000-60,000 square foot users. This need is driven by tenants needing smaller footprints with more dock doors to fulfill the final mile delivery. We currently have about 3.5 million square feet of class A space under construction. The overall vacancy rate is 12.6% for Class A product, the majority being greater than 60,000 square feet, and only 3.5% for all other types of industrial product. The main reason for this discrepancy is lease rate. Current rates do not justify developers to build this product. Therefore, space continues to get absorbed with no new space being added to the market.
The sales market can be divided in to two categories: users and investors. The user market has been in high demand for several years now and will continue that way. The increase in rent has driven a lot of tenants to explore owning their real estate, which in turn has driven up sales prices also. The investment market will continue to be strong as well. Industrial investments in the core hub’s (NJ, Atlanta, Chicago and Inland Empire) have become very difficult to identify and the capitalization rates (cap rate) have been compressed to all-time lows. Because of this, investors are now seeking out quality real estate in secondary markets with better returns than they can find in the core markets. Columbus is recognized as such a market due to being a key distribution hub for the Midwest and parts of the East Coast.
I touched briefly on new construction, previously mentioning there is currently 3.5 million square feet under construction. NorthPointe continues to expand the Rickenbacker market further south into Pickaway County. The recent announcement of Clayco purchasing 250 acres for new development at I-70 and State Route 310 in Licking County shows how our market continues to expand. However, I think there is greater competition for the smaller infill sites. Daimler had enormous success with their AirSide projects, and Mark Taggert is successful as well with his Air South project, both located near John Glenn International Airport. Also, this will drive developers to get creative and re-purpose nontraditional sites to fill that tenant’s desire for smaller infill sites.
In closing, we feel the leasing market for larger space will remain steady as it was in 2017, but we do not see any huge explosion of larger deals. However, there will be new distribution centers coming to Columbus because of its excellent location. There will also definitely be a push to develop smaller infill spaces for final mile delivery. Second and third generation space will continue to get quickly backfilled as it goes vacant. The sales market for users will slow down slightly due to lack of available product, rising sales prices and the steady rise in interest rates. Even though the investment product is tight, it will keep trading, and I wouldn’t be surprised to see at least one large multi-market portfolio sale. Developers are going to be flipping over every rock they can looking for the next deal or best development site.