Market Watch

Blowing and Going

3rd Quarter 2017 Hotline

Market Watch
by Joe A. Hollingsworth, Jr.

At the end of the first quarter in 2017, the US industrial market has really never been stronger. Specifically, only 5.4% of the nation’s industrial space was vacant; and, it turns out that this percentage is the lowest rate on record. Even though new construction slowed down at the end of 2016, there was almost 60 million square feet of new supply that was completed and absorbed in Q1 2017. This is a tremendous record.

Market rents for higher quality space are averaging above $6.00 PSF; and, as we have written before with the ridiculous new EPA enforced energy codes and drainage codes adopted by several states, they are affecting new construction prices dramatically. We predict that rents will average $6.40 PSF nationally by the end of the Q1 2018.

So, where is all the space demand coming from?: 1) The onshoring of companies is accelerating because of the current administration’s jawboning and trade policies; 2) the House of Representative’s proposed Border Adjustment Tax; 3) Monies needing to flee the “China bubble”; 4) the incremental increase of demand for products that are currently made in the US; and, 5) a burst of innovation in retailing and logistics.

A case in point on the President’s trade policy working is that out of 30 years of showing industrial property up to December 1st, 2016, we had only seen one Chinese company express any interest in the Southeast. However, since January 1st, we have had four specific serious Chinese interactions. These range from 90,000 SF up to 300,000 SF. Two of the Chines companies openly said that the reason they are moving is that they have been making the same product in China for over twenty years, and they read the “handwriting on the wall” and are now going to have their first American footprint. Some on the “left” would say this is coincidence. However, instead, this is real hard, tangible evidence that a seismic shift is occurring and increasing the pace of onshoring which is bringing high-paying manufacturing jobs back to America.

Another observation relating to the above list of reasons that space is being “taken down” at such a rapid rate is the supercharged innovation cycle that always follows an economic crash, slow recovery, or a period of overregulation (which in this case we have all three). The supercharged innovation that we are seeing is technology combined with a slight shortage of labor. Ingenuity is creating this cycle of supercharged innovation causing “reconfiguring” in ways we currently make products using new composite materials creating new products and the need for space.

I think the next twelve years are likely to be the best sustained period in our economic lives. Speed bumps will occur; however, this will be like the Reagan/Clinton years, only on steroids.