Scope Narrows (Download Full Report)
The overall vacancy trend appears to be heading in the right direction. Since the beginning of 2013 vacancy has only declined by a modest 60 basis points. The majority of this can be attributed to new construction completions and several large tenants upgrading spaces. During the quarter Admiral Beverage more than doubled their space and moved into a new 219,000 refrigerated warehouse facility. Additionally, Pepsi Co. expanded their operations by almost twenty percent and moved into a 56,000 square-foot warehouse space on the West Mesa.
These moves typify the fastidious nature of today’s market. With a very limited supply of spaces over 100,000 square feet, warehouse and distribution users are taking advantage of depressed land costs and attractive financing terms to build their own facilities. On the leasing side, the amount of larger spaces over 50,000 square feet that meet the minimum requirements for clear heights and proximity to the interstates is also very low. Speculative construction starts remain dormant to meet this demand. Even with affordable land prices many developers are reluctant to start new projects since the lease rates would be well over market rates. High construction costs and confidence demand for larger spaces will remain constant are the limiting new starts.
During the quarter most of the activity was driven by national tenants making strategic moves. A handful of new companies opening were offset by downsizings and consolidations. For local tenants about forty percent of the total absorption in 2014 was provided from non-traditional users like charter schools, fitness gymnasiums, and churches taking advantage of affordable industrial spaces.
Overall demand for space is expected to be flat over the next two quarters. Absent a dramatic increase in new housing construction, growth in new activity will likely be minimal. A small amount of deals for larger spaces should help to offset the increase in consolidations and downsizings. Look for a modest increase in the amount of sublease spaces brought to market. These will likely occur primarily in R&D/Flex property types.
New speculative construction starts will be virtually non-existent throughout 2014. The majority of new construction projects should be larger build-to-suits for single users or owners developing projects themselves. Depressed land prices especially for large land tracts over ten acres should drive this trend. Additionally renovations of functionally obsolete properties should become more prevalent especially for non-traditional users.
One bright spot in the industrial market will be growing demand for investment properties. This trend gained momentum towards the end of 2013. As investors began to increase their risk profile many will be looking to secondary and tertiary markets to achieve higher returns.
Tenant: Materion Advanced Materials
Landlord: G & A, Ltd.
Location: 5941 Midway Park Blvd NE
Size: 28,800 Sq.Ft.
Tenant: Land O’Lakes, Inc.
Landlord: Wild Turkey, LLC
Location: 3005 Broadway Blvd SE
Size: 12,690 Sq.Ft.
Tenant: Mastec Network Solutions
Landlord: Sandia Foundation
Location: 8600 San Mateo Blvd NE
Size: 32,520 Sq.Ft.
Landlord: ardner Zemke, Co.
Location: 7600 Reading Ave SE
Size: 24,000 Sq.Ft.