Industrial Shifts into High Gear
- Demand for industrial space was much stronger in the third quarter of 2016 than the second
- Demand outstripped new supply, and asking rates are increasing once again
- Speculative construction has not hurt the market, and therefore will continue into 2017
Demand for industrial space, which softened during the first half of 2016, roared back to life in the third quarter. Industrial net absorption stood at 1,020,325 square feet in the third quarter of 2016, bringing year-to-date net absorption up to 2.7 million square feet. While it is unlikely that net absorption in 2016 will reach the level seen in 2015, the boost in demand seen this quarter could continue into next year and help make for a strong 2017. New completions of industrial space totaled 640,336 square feet in the third quarter. Vacancy decreased to 5.2 percent, the lowest it has been since the third quarter of 2007, a decade ago. The weighted average asking rate, after a dip last quarter, climbed back to $0.65 per square foot (psf) on a triple net (NNN) basis.
Historical Vacancy Rates & Asking Lease Rates
Southern Nevada’s industrial job market improved in July 2016 (the latest month of data available) compared with July 2015, adding 10,400 jobs in sectors usually associated with industrial real estate over the past twelve months, including 6,800 of them in the construction sector. The transportation & warehousing sector added 2,400 jobs over the past twelve months, the manufacturing sector added 500 jobs, and the wholesale sector added 700. This represented stronger job growth than one quarter ago. Unemployment in the Las Vegas- Paradise MSA stood at 6.7 percent as of July 2016, down from 7.1 percent in July 2015. From July 2015 to July 2016, total employment in Southern Nevada has increased by 27,000 jobs.
Southern Nevada’s industrial inventory expanded by 640,336 square feet in the third quarter of 2016, bringing total inventory growth in 2016 to almost 2.4 million square feet, up from one year ago. Industrial development has been on the rise over the past three years, and is only growing stronger as continued high demand for product whets the appetites of developers who have had to sit on their hands for nearly a decade. Projects under construction totaled 3.9 million square feet in the third quarter of 2016, and were 36 percent pre-leased or build-to-suit. This is an improvement over last quarter. We anticipate 1.3 million square feet of completions in the fourth quarter of 2016, with 32 percent pre-leasing.
Southern Nevada’s industrial market has now posted positive net absorption every quarter since the fourth quarter of 2012. This streak was extended this quarter with 1,020,325 square feet of net absorption, the strongest quarterly net absorption since the third quarter of 2015. Gross absorption was 2.7 million square feet in the third quarter, which was a decrease from last quarter, but well within the normal range for industrial gross absorption over the past few years.
Net absorption was positive in four of the Valley’s seven submarkets this quarter. The highest net absorption was in North Las Vegas (819,153 square feet), followed by Southwest (292,120 square feet), Airport (33,138 square feet) and Northwest (7,598 square feet). Negative net absorption occurred in Henderson (negative 81,402 square feet), West Central (negative 47,963 square feet) and East Las Vegas (negative 2,319 square feet). Henderson is the submarket to keep an eye on, given that almost 1.5 million square feet of warehouse/distribution product is slated to be completed in that market over the next four quarters with relatively little pre-leasing.
After a long stretch of decreasing vacancy, Southern Nevada’s industrial market wavered a bit in the first half of 2016, probably due to a combination of a softening economy and the completion of 1.8 million square feet of new industrial product, much of it speculative. In the third quarter of 2016, the market got back on track, with the vacancy rate decreasing to 5.2 percent, its lowest level in ten years. Economic growth in Southern Nevada looks stronger now than it did earlier this year, and this has certainly contributed to a stronger demand for industrial space.
Historical Net Absorption vs. Completions
Occupancy vs. Industrial Employment
The industries most active in occupying industrial space over the past twelve months were involved in wholesale (most likely serving the Resort Corridor), transportation and warehousing, and retail. Local companies took about 41 percent of the leased square footage we tracked over this period. Companies headquartered in the Southwest U.S. took 22 percent, while 10 percent from the Great Plains, which includes Texas.
The weighted average asking lease rate for industrial space increased this quarter to $0.65 psf NNN. This was $0.03 higher than one quarter ago, and $0.05 higher than one year ago. If adjusted for inflation, the weighted average asking lease rate is $0.48 psf NNN, a $0.03 increase from one year ago. The current asking rate, adjusted for inflation, is $0.03 lower than it was during the economic recovery that occurred in 2004. Units leased in the third quarter of 2016 had effective lease rates that averaged 98.7 percent of asking rates, a distinct drop from the second quarter’s rate of 110.5 percent, and an indication that the adjustment in asking rates was warranted. Increases in asking rent will continue in 2017.
In 2015, final industrial investment sales volume was $295.8 million in 43 sales that totaled 3.1 million square feet. The average sales price in 2015 was $96.58 psf, and the average cap rate was 7.1 percent, a slight compression from 2014’s average cap rate of 7.3 percent. Year-to-date in 2016, we have seen industrial investment sales volume of only $90.5 million in 25 sales totaling 1.2 million square feet. This gives us an average sales price per square foot of $77.43. The average cap rate in 2016 so far has been 7.3 percent, an increase from last year. Southern Nevada’s industrial market had over 1.3 million square feet of product available for sale as investments, with an average asking price of $108.39 psf, and an average cap rate of 6.4 percent. Demand for industrial space as an investment peaked in 2013, and has been decreasing since then.
After sluggish demand in the first half of 2016, the warehouse/ distribution sector revved up in the third quarter and posted 923,550 square feet of net absorption, bringing the year-to-date total to almost 1.9 million square feet. As good as this is, it lags a bit behind last year’s performance. It also lags slightly behind new completions of industrial space in 2016, and as a result warehouse/distribution vacancy is higher this year than last. Third quarter 2016 vacancy was 4.1 percent, a decrease from last quarter, but 0.8 points higher than one year ago. As mentioned above, the warehouse/distribution sector is poised to add another 1.7 million square feet to inventory in the fourth quarter of 2016, with minimal pre-leasing. This will likely drive vacancy rates higher next quarter, and may depress asking rental rate growth.
While the light distribution sector has seen positive net absorption for the past thirteen quarters, net absorption has been decreasing for the past five quarters. Net absorption was only 21,126 square feet in the third quarter, with new completions totaling 130,580 square feet. This drove vacancy up to 6.1 percent from last quarter’s 5.6 percent. Job growth in light distribution-related industries has been strong over the past two years, and this job growth, coupled with weakening demand, suggests that while businesses are adding workers to keep up with demand they as yet do not need to expand their occupancy. Hopefully, that expansion is looming, and fortunately for light distribution owners, there is no impending new supply of light distribution projects on the horizon. The asking rental rate for light distribution space is almost $0.20 higher now than it was two years ago.
The light industrial sector fared about as well as light distribution in the third quarter of 2016, with 26,686 square feet of net absorption. This slowdown in demand was not accompanied by an increase in inventory, so light industrial vacancy continued to fall, reaching 4.9 percent this quarter. The average asking rate increased by $0.04 this quarter to $0.67 psf NNN. A vacancy rate of 4.9 percent would suggest that light industrial development is forthcoming, but land and construction costs are keeping developers at bay for the time being. The incubator and flex sectors posted very different performance in the third quarter. The incubator sector posted negative 363 square feet – essentially no net absorption – which kept incubator vacancy at 7.9 percent. This remains an improvement over the 10.5 percent vacancy posted one year ago. Flex, on the other hand, posted 49,326 square feet of net absorption, less than last quarter, but still healthy demand. This brought flex vacancy down to 10.7 percent from 11.4 percent one quarter ago and 15.1 percent one year ago.
At mid-year 2016, we questioned whether demand would continue to weaken in 2016. The third quarter answered that question with a powerful “no”. Underlying economic conditions in Southern Nevada, which had indicated a general economic slow-down are now pointing to stronger quarters ahead, which will hopefully mean strong demand for industrial space in the fourth quarter of 2016. With seemingly all pistons firing for the industrial market, the only potential trouble on the horizon is in the Henderson submarket, with 1.5 million square feet of new warehouse/distribution product to be completed next quarter and relatively weak demand to meet it. Demand may pick up, of course, but if it does not there will be slightly elevated vacancy while the market absorbs this space. Fortunately, it is not likely that this product will dampen demand for product in the North Las Vegas and Southwest submarkets.
“Demand for industrial space, which softened during the first
half of 2016, roared back to life in the third quarter.”−John Stater, Research & GIS Manager | Las Vegas
Q3 2016 Industrial Report
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The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.