Industrial vacancy rates shrinking

Developers are adding distribution space in the Inland area but not a lot of buildings to house a small- or medium-sized factory.

Big-box warehouse users and manufacturing companies looking for smaller industrial buildings are finding a real estate market that is tightening, a series of recently released market reports found.

The overall vacancy rate for all industrial buildings in Inland Southern California, from large distribution centers to small factories, continued to decline in the fourth quarter. Several studies by brokerage firms and researchers estimated it at between 4.8 and 5.4 percent.

That would represent a substantial decline. According to a year-end report from real estate research group CoStar, the vacancies in this sector have dropped from 6.1 percent at the end of the third quarter and from 6.2 percent at the close of 2013’s first quarter, a decline of close to 20 percent in less than a year. CoStar’s report estimates the current vacancy level at 5.4 percent.

That might be squeezing out some smaller manufacturers who are looking for a home, people in the industry say. Last year saw several big distribution centers under construction, but not many facilities for a small- or medium-sized factory.

“We’re seeing some strong absorption, but the key is, the developers are not building replacement inventory for 100,000-square-foot buildings or below,” said John Boyer, executive vice president for the Ontario office of NAI Capital.

The tightening market for existing smaller properties comes at a time when some independent companies seem interested in buying. The number of small businesses interested in a 504 loan, a U.S. Small Business Administration-backed financing plan that allows entrepreneurs to own the facilities they operate, was up for most of 2013.

However, some of those business owners could be thwarted by the lack of inventory. Boyer said there is little space in the Ontario area’s warehouse hub for a smaller factory but some infill space farther east.

“Now developers are starting to do an ‘Aha’ ” about the need to build new facilities, Boyer said. “As the economy heals, the users who survived are looking to buy.”

Rick John, senior vice president at Daum Commercial Real Estate and president of the Inland Empire and Orange County chapter of the Society of Industrial and Office Realtors, said there’s been no shortage of new construction larger than 100,000 square feet in the area.

“For smaller buildings, there’s demand without supply,” John said. “Our market has not put any product out for these smaller buildings in the last five years.”

Part of the issue is price, John said. Developers frequently still believe the risks don’t justify the investment.

Also, part of the issue is traced to residents who don’t want industrial properties in their areas, said Bruce Springer, a senior vice president with Lee & Associates.

“The roadblock is the entitlement process, from California and from cities and counties,” Springer said. “It’s onerous, and it makes it difficult to build manufacturing buildings.”

Philadelphia Area Fourth Quarter 2013 Apartment Market Report

Economy on Sound Footing, Driving Apartment Sales

Respectable job growth and the formation of new households reduced vacancy in the Philadelphia metro over the first nine months of 2013 and is supporting a strong multifamily sector. Nearly every private-employment sector added workers during the period, though many industries still have additional hiring to do to recapture all of the positions lost during the downturn. Job opportunities in degreed fields or those requiring specialized training, such as healthcare, are available, but lower-skilled workers continue to face challenges. Specifically, deficits to former peak staffing levels in retail and wholesale trade persist and may be suppressing the performance of apartment buildings on the lower rungs of the quality scale. Economic trends are pointing upward, however, which could hasten the pace of hiring in lagging employment sectors in the quarters ahead. A recent regional survey by the Federal Reserve showed a rise in the index of new orders for goods and services and also signaled improved prospects for hiring.

Although investor demand outweighs the number of properties listed for sale, deal volume continues to surge. Nonetheless, the recent rise in long-term interest rates is motivating additional owners to place properties on the market. Generally, for owners contemplating a sale in the next year or two, the current bidding climate and the relatively modest rise in interest rates improves the probability of executing a transaction. Lenders are competing to provide acquisition loans, with leverage reaching as high as 80 percent. In many instances, local and regional banks have emerged as more competitive sources than the agencies. Cap rates are virtually unchanged from six months ago, and healthy disparities persist between first-year returns on different classes of assets. Class A properties, for example, typically trade in the low- to mid-5 percent range, while Class B properties change hands in the mid-6 to low-7 percent band. Cap rates for Class C or lower-quality properties with working-class tenancies typically start in the mid-8 percent range, though many deals settle closer to 9 percent.

2013 Annual Apartment Forecast

• Employment: Payrolls will swell by 33,000 jobs in 2013 to expand employment in the metro 1.2 percent. Growth in education and health services employment underpinned the creation of 28,700 positions in 2012.
• Construction: Projects containing 3,400 units will come online in 2013, up from 1,278 rentals last year. New stock will be placed in service in 10 of the metro’s 16 submarkets. The greatest impact is in Center City, where 1,429 new rentals will expand stock 4.6 percent.
• Vacancy: Vacancy will decline 30 basis points this year to 4.9 percent, the lowest year-end level in six years. The vacancy rate was unchanged in 2012.
• Rents: Following a 1.1 percent bump in 2012, average rents in the metro will rise 2.6 percent this year to $1,128 per month. With the projected increase, rents will have climbed 10 percent since bottoming four years earlier.

https://www.marcusmillichap.com/services/research/webreports/Philadelphia/Apartment.aspx

 

Northern New Jersey Area Fourth Quarter 2013 Apartment Market Report

New Supply Absorbed as Rents Rise in New Jersey

Apartment demand created by the surge of new jobs generated in Northern New Jersey and in Manhattan is giving local operators more leverage when negotiating leases. This is particularly true as the cost of living in Manhattan rises, forcing tenants to migrate across the Hudson River in search of affordable housing. Now that occupancy in the region is above 96 percent, operators are raising rental rates more aggressively in townships without rent control laws. This is pushing apartment demand further inland and into areas without direct proximity to major transportation corridors. Builders have responded relatively quickly to favorable conditions, activating previously approved multifamily permits. Completions of market-rate apartments have pushed ahead over last year’s deliveries, with most of the units concentrated in Jersey City and Hoboken. As this new space enters the market, strong demand will generate a normal turnover rate, keeping replacement expenses low.

Through the first three quarters of 2013, the number of apartment listings was insufficient to meet buyer demand in Northern New Jersey, a trend that is anticipated to continue through year end. Anticipation of the Fed’s actions resulting in rising interest rates, combined with the competitive buyer market, motivated some investors to list their properties while they retained the most control over the final sale price. Value-add properties in highly desired neighborhoods are trading at cap rates in the mid-4 percent area, though after renovations, the real cap is evaluated to be in the mid-6 percent range. First-year yields in the 8 percent range are sought after in more stable communities in northern Newark. However, high-yield assets are limited and most properties in the $1 million to $10 million range are trading between a mid-4 to mid-5 percent cap rate. Investors searching for a leg up are revaluating previously bank-owned assets or properties disposed by individuals unable to meet previous loan obligations.

2013 Annual Apartment Forecast

• Employment: Job growth will continue to expand in the fourth quarter as 30,000 positions are created in 2013, a 1.6 percent annual increase. In 2012, payrolls reached 29,700 positions.
• Construction: Approximately 2,194 units are scheduled to be completed in 2013. Last year, 1,240 units were brought online. In both years, the majority of the units have been delivered in Hudson County.
• Vacancy: By year end, new supply of apartments and single-family options will tick up vacancy 40 basis points to 3.4 percent. In 2012, vacancy dipped 20 basis points to 3.0 percent as new deliveries were limited.
• Rents: Strong demand for rentals across the region will push overall effective rents up 3.9 percent to $1,820 per month in 2013. In the previous 12 months, rents dropped 7.3 percent.

 

https://www.marcusmillichap.com/services/research/webreports/NewJersey/Apartment.aspx

New York Metro Area Fourth Quarter 2013 Apartment Market Report

Deal Flow Jumps as New York Operations Remain Solid

The pace of job creation in the five boroughs has eased from one year ago, but the rental housing market remains healthy. Strong demand drivers will persist through the end of this year, while supply growth will also accelerate. With employment rising and other economic indicators providing encouragement to builders, the city is in the midst of a development cycle. Groups will continue to push projects through the approval process as 2013 winds down in advance of a change in the Mayor’s office in 2014. Notably, the city council is expected to vote on a massive re-zoning of the 73-block Midtown East area before the end of 2013. In the boroughs, development is booming in Queens, especially in Long Island City, a location that offers residents a relatively short subway ride to Midtown Manhattan employers. Roughly 8,000 units of housing are anticipated to come online in the borough over the next three years.

The investment market continues to flourish as significant gains were recorded in transaction velocity and dollar volume over the past year. A rise in long-term interest rates early in the third quarter had little effect on deals, and a more significant move in long-term interest rates will have to occur to trigger a broader and more profound re-pricing of assets. Until then, a keen bidding climate will persist. More than three-fourths of all transactions in the city over the past year took place in the $1 million to $20 million price tranche, a segment of the market dominated by private investors, including many local parties. Attractively priced acquisition debt and heightened competition among lenders will sustain a robust level of property purchases within this pool of investors in the months ahead. In the midst of a period of solid economic growth, the market remains supple, constantly shifting shape as new neighborhoods come to the fore. An extension of the 7 train to 10th Avenue next year, for example, will open up a new area of the city for developers and investors, while the ongoing development in Queens will also elevate the borough’s appeal.

2013 Annual Apartment Forecast

• Employment: Employment in the five boroughs will expand 1.8 percent in 2013 through the creation of 70,000 jobs, primarily in education and health services, and leisure and hospitality. In 2012, 78,200 positions were created in the city.
• Construction: In 2013, developers will bring online approximately 7,000 rentals in the five boroughs, an increase from more than 5,000 units last year. The building cycle will continue, as more than 15,000 units of multifamily housing are on track to receive permits this year.
• Vacancy: The vacancy rate in the New York metro will rise 10 basis points to 2.6 percent in 2013; a decrease of 10 basis points was recorded last year.
• Rents: Average rents will advance 2.5 percent in 2013 to $3,455 per month. A gain of 11.5 percent was registered during 2012.

http://www.marcusmillichap.com/Services/Research/#1