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U.S. Industrial Market to Strengthen in 2015

San Diego CA— The four-year recovery of the U.S. industrial real estate market is poised to continue in 2015, with demand again projected to outpace supply, availability continuing to decline and rents rising, according to CBRE Research’s 2015 U.S. Industrial Outlook.

“There is still plenty of upside for the industrial market, particularly for rental growth. Both cyclical demand drivers—GDP growth, expanding manufacturing sector—and structural demand drivers—e-commerce, supply chain evolution—will promote strong user demand across geographies and product types,” said Scott Marshall, Executive Managing Director, Industrial Services, The Americas, CBRE.

Strong demand pushed net absorption to 224.1 million sq. ft. in 2014—above its long-term average of 133.0 million sq. ft.—which, in turn, will cause rents to rise by 4 to 5 percent over the course of 2015. However, rents, while growing quickly, won’t return to their pre-recession level until the latter part of 2016.

This national industrial story is playing out at the local level in San Diego, where the job growth and the recovering economy are strengthening market fundamentals. “The industrial market in San Diego saw near pre-recession lows in vacancy with positive indicators across the board in 2014. The recovering economy, the reshoring of many industrial-related manufacturing jobs, the defense sector obtaining both new and renewed contracts, as well as recent big investments in the biotech sector have all fueled confidence in the market,” said John Frager, Executive Managing Director for San Diego. “In 2015, we expect to see continued big sale price appreciation, significant lease rate appreciation, and more spec development.”

Nationally, availability will continue to fall, but the rate of decrease will slow as the construction of new space increases. New construction is expected to rise to 141.8 million sq. ft. nationally in 2015—up from 115.2 million sq. ft. in 2014. This compares with a long-term average of 155.4 million sq. ft. By the end of 2015, supply and demand will be closer to equilibrium and availability will begin to find its natural spot, settling near 10 percent.

Other highlights of the report, written by David Egan, Americas Head of Industrial Research, CBRE, include:

New supply levels will rise, but rising construction costs could dampen development

Construction was virtually non-existent in the aftermath of the recession and has only gradually recovered in recent years. With modern distribution space in short supply fueling development activity over the past 12 to 18 months, total new completions should finally reach long-term averages in 2015. However, rapidly rising construction costs threaten to temper construction growth in the mid to long term.

Technology, automation (not reshoring) will spur more demand for manufacturing space

U.S. manufacturing is on the rise, with production outputs now at all-time highs. However, these gains are due largely to increases in technology and automation and are not a result of elevated employment or reshoring. The increase in outputs has a simulative effect on industrial demand in key manufacturing and supply chain markets.

Light industrial poised for strong growth in 2015

Light industrial facilities, properties smaller than 200,000 sq. ft., may be best bet for growth in 2015. These facilities have historically outperformed larger distribution centers in terms of rental growth, but have lagged behind in the current cycle. With demand rising for facilities in smaller infill locations in land- and supply-constrained urban areas, light industrial fundamentals will see a boost in 2015.

To request a copy of the report or to speak with a CBRE expert, please contact Robert McGrath (212.984.8267 or Robert.McGrath@cbre.com) or Corey Mirman (212.984.6542 or Corey.Mirman@cbre.com).

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