E-commerce continues to push retailers, wholesalers and third-party logistics companies into newer and larger fulfillment centers in core markets throughout North America.
The core North American big-box sector finished 2016 with record fundamentals, including all-time highs in annual net absorption, leasing activity, product in development and construction completions, according to a new report by Colliers International.
This activity is driven by e-commerce as it continues to push retailers, wholesalers and third-party logistics companies into newer and larger fulfillment centers in core markets throughout North America.
Robust development will continue in 2017, according to Colliers, keeping vacant inventory in line with the current rate, which will, in turn, slow the growth of effective rents for the foreseeable future and provide prospective tenants with more options at a stabilized cost.
On the heels of the all-time-low 5.3% capitalization rate in 2016, the report predicts low cap rates will continue in 2017 due to the popularity of industrial big-box product with domestic and international investors.
The group assessed the likely likely changes in policy direction from Washington and says that the “in the short term, factors including tax cuts, lower regulations and greater infrastructure and military spending could provide an additional boost for industrial real estate. Longer term, shifts in trade policies could cloud the outlook for industrial product.“
However, Colliers believes that the changes that results from changing trade agreements will take a while to trickle down to industrial real estate demand. Accordingly, occupiers will still need to seek the right locations, inventory levels and building amenities to compete in North America’s burgeoning “need-it-now” economy.
Highlights from the report include:
- Demand for big-box properties remains exceptionally strong with only 171 of 2,064 existing buildings currently 100% vacant.
- Record levels of new construction in Q4 2016 increased vacancy rates to 7.7% at year-end, up 1.2 percentage points compared to the previous quarter and 0.2 percentage points compared to the previous year.
- 105 MSF were leased in 2016, up 9.6% from the previous year.
- Effective rents reached $4.66 per square foot/year net lease (PSF/ YR NNN) in 2016, up 10.9% compared to 2015. Despite the increase, effective rents leveled off in Q4 due to higher amounts of vacant space on the market.
- 87 MSF of new construction were completed in 2016 (67% speculative) versus 65 MSF in 2015.
- Strong interest from institutional capital kept cap rates low at 5.3%, even though overall transaction levels declined last year.
- With more than 75 MSF currently under construction, vacancies should be stable in 2017 and activity will likely remain robust for the foreseeable future.