Pulse Quickens (Download Full Report)
The market appears to be slowly waking up and gaining momentum across a broader range of property types. Previously, most of the activity was focused on larger warehouse and distribution spaces over 20,000 square feet. During the quarter activity increased across most segments. Compared to the previous quarter the number of inquiries was noticeably higher for a broader range of space requirements. This translated to 20 percent more of deals being signed versus the previous year. Confidence appears to slowly be returning.
As the market bottom appears to be forming a strong base, many tenants are seeking to improve their quality of space and location characteristics. The predominant theme is that a sense of urgency is returning and options are actively being investigated. On the supply side a significant amount of the available inventory is comprised of older, functionally obsolete spaces. Even with attractive pricing this inventory is typically being over looked. As the more desirable inventory is getting absorbed, the overall asking rates are beginning to trend downward.
The trend for non-traditional users like charter schools, fitness gymnasiums, and churches taking advantage of affordable industrial spaces appears to be a mainstay of the market. Almost twenty percent of the overall space absorbed since the beginning of the year can be attributed to non-traditional tenants. Combined with virtually no new speculative construction projects moving forward have helped to stabilize the overall market.
Notable Industrial Transactions
Tenant: Pepsi, Co.
Landlord: BD Development II, LLC
Address: 540 Gallatin Pl NW
Size: 56,893 Sq.Ft.
Tenant: Molina Healthcare (Sublease)
Sublessor: SBS Technologies
Address: 7401 Snaproll NE
Size: 49,529 Sq. Ft.
Tenant: Precision Gymnastics
Address: 4606 McLeod Rd NE
Size: 20,200 Sq.Ft.
Leasing activity should remain strong throughout the end of the year. As the single-family housing market gains momentum and the supply falls, new housing starts are expected to increase slightly. Several new commercial projects underway should also provide some stability to the overall market.
The wild card is concerns of additional budget cuts related to sequestration in the defense sector. This could have a damping effect on overall demand along with tenant willingness to lock in favorable terms over longer periods. Instead shorter lease terms of two years or less are likely to remain common. Landlords may also find tenants reluctant to renew and lock in rates. Lease termination clauses tied to specific events such as a loss of a key contract will remain popular.
Attractive land prices, especially for large land tracts over ten acres, are expected to increase the level of new build-to-suit and owner developed projects. A very low supply of quality spaces over 50,000 square feet is also expected to spur projects such as these. Conversely, new speculative construction starts are likely to remain dormant throughout mid-year 2014. Renovation strategies of older functionally obsolete properties should begin to gain popularity.