The U.S. industrial real estate market has been recovering, although not at a rapid pace. Still, there are definite signs of life in the coastal markets, such as Los Angeles, San Francisco, Seattle, Miami and markets in Virginia and Georgia, according to Reis, Inc.
The reason, a number of the East Coast industrial markets are preparing to accommodate Post-Panamax ships (which are larger than the ones coming through the canal today) in 2015, the year that the expansion of the Panama Canal is scheduled for completion.
Some of these ports, which are anticipating more demand for industrial warehouse space when the Panama Canal expansion is finished, have been dredging to handle the bigger ships. But the task is neither easy nor inexpensive. "The Port Authority of New York and New Jersey will be forced to spend roughly $1 billion to raise the Bayonne Bridge if the port is to be accessible to larger container ships," says Brad Doremus, senior analyst at Reis.
Other East Coast markets like the Port of Miami are also involved with significant infrastructure improvements and deep dredging costs running into the billions of dollars in order to prepare to receive these post-Panamax container ships.
Although there was improvement in the industrial real estate market in the second quarter, the second half of 2012 does not show as much as promise, says Doremus. Vacancies in the second quarter decreased by 30 basis points, but vacancy levels will be flat in the third quarter, he says.
"We are now starting to see the trickle-down from a slowdown in manufacturing, which is having an adverse affect," says Doremus. A manufacturing index put out by the ISM (Institute for Supply Management), has showed signs of contraction in the last few months, he says.
Also dampening future prospects for the industrial real estate market are global concerns, such as the financial situation in Europe and slowdowns in emerging economies, such as China and Brazil, which are not growing as fast as they had been, says Doremus. Plus U.S. consumer spending is down from early in the year, he says.
"The distribution warehouse portion of the industrial real estate sector is dependent largely on consumer spending," so if U.S. consumers don't buy as much on Amazon, for example, the need for this kind of space is diminished, says Doremus.
In spite of the luke warm expectations for the economy and the industrial real estate market in the second half of 2012, the amount of new industrial space completed by the end of 2012 is expected to be higher than last year, when there were roughly 15.3 million square feet completed, says Doremus. In contrast, in 2012, 26 million square feet are scheduled for completion, he says. "While the supply of industrial space has been constrained in the last few years," because of a lack of demand, "there is a shortage of high-quality space. As developers see room for some new supply, there may be good demand for this kind of space," says Doremus.
As of the second quarter of 2012, the average asking rent in the US industrial market was $5.35 per square foot, and taking into account concessions, the affective rent was $4.81 per square foot.
Of course in certain primary markets, average rents are higher, says Doremus. In Los Angeles, the average asking rent for industrial space in the second quarter was $6.41 per square foot and $9.66 per square foot in San Francisco.