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Q4 2012 | INDUSTRIAL

NORTH AMERICA

HIGHLIGHTS

Q4 2012 | INDUSTRIAL NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period US US Canada
Q4 2012 | INDUSTRIAL NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period US US Canada
Q4 2012 | INDUSTRIAL NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period US US Canada
Q4 2012 | INDUSTRIAL NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period US US Canada
Q4 2012 | INDUSTRIAL NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period US US Canada
Q4 2012 | INDUSTRIAL NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period US US Canada
Q4 2012 | INDUSTRIAL NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period US US Canada

MARKET INDICATORS

Relative to prior period

US

US

Canada

Canada

Q4

Q1

Q4

Q1

2012

2013*

2012

2013*

VACANCY

VACANCY
VACANCY
VACANCY
VACANCY

NET ABSORPTION

CONSTRUCTION

CONSTRUCTION
CONSTRUCTION
CONSTRUCTION
CONSTRUCTION

RENTAL RATE**

RENTAL RATE**
RENTAL RATE**
RENTAL RATE**
RENTAL RATE**

*Projected, relative to prior period **Warehouse rents

N.A. INDUSTRIAL MARKET

SUMMARY STATISTICS, Q4 2012

 

US

CAN

NA

VACANCY RATE

8.92

4.25

8.42

Change from Q3 2012 (%)

-0.31

-0.24

-0.30

ABSORPTION (MSF)

64.0

6.9

70.9

NEW CONSTRUCTION (MSF)

24.0

3.7

27.7

UNDER CONSTRUCTION (MSF)

56.0

14.1

70.1

ASKING RENTS PER SF (USD/CAD)

US

CAN

Average Warehouse/

4.82

7.55

Distribution Center

Change from Q3 2012 (%)

1.07

0.66

WWW.COLLIERS.COM

Industrial Measures are in a Near-Perfect V Formation.

K.C. CONWAY EMD | Market Analytics

Key Takeaways

• Q4 was the best quarter for industrial warehouse property transactions since Q3 2007. Industrial warehouse property transactions were up 4% in 2012 to $36.9 billion. Approximately 37% of these transactions ($13.5 billion) occurred in Q4 2012

• 2012 net absorption in Colliers’ 75 primary North American industrial markets surpassed 160

million square feet. 70.9 MSF were absorbed in Q4, or 40% of the 2012 total. Approximately

90% of Q4 leasing activity occurred in the U.S.

• 30% of Q4 North American net absorption occurred in just five MSAs: Toronto (4.95 MSF), Detroit (4.7 MSF), Los Angeles – Inland Empire (4.4 MSF), Dallas/Ft. Worth (3.2 MSF), and

Memphis (2.9 MSF). All five markets are home to the nation’s busiest intermodal rail operations, with the exception of Chicago.

• The North American industrial vacancy rate dropped 30 basis points in Q4 to end 2012 below 9.0%. The North American vacancy rate ended 2012 at 8.42%, and the U.S. vacancy rate at 8.92%.

• Ten major North American markets have vacancy rates at or below 6.5 percent. Montreal
• Ten major North American markets have vacancy rates at or below 6.5 percent. Montreal (4.3%)
and Calgary (5.0%) in Canada; Orange County, CA (4.9%), Omaha (5.1%), Houston (5.2%),
Indianapolis (5.3%), Long Island, NY (5.6%), Seattle (5.8%), Los Angeles – Inland Empire (6.5%)
and Milwaukee (6.5%) in the U.S.
NORTH AMERICAN INDUSTRIAL VACANCY, INVENTORY AND ABSORPTION | Q4 2012
Absorption Per Market (SF)
q3 '12 - q4 '12
3,000,000
1,500,000
300,000
-300,000
-1,500,000
-3,000,000
Sq. Ft. By Region
4 billion
4.0000000
2
billion
2.0000000
4.0000000 400 mil
Occupied Occupied SF Sq. Ft.
Vacant Vacant SF Sq. Ft.

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

• Post-Panamax readiness progresses on the East Coast: Baltimore joined Norfolk, VA, as the only other post-Panamax port on the East Coast in 2012. New York is progressing with project to raise the Bayonne Bridge 60 feet. Miami has ordered new post-Panamax cranes. Charleston is on track as well.

new post-Panamax cranes. Charleston is on track as well. Port of Baltimore has deployed new PPMX

Port of Baltimore has deployed new PPMX cranes Photo: dol.gov

of Baltimore has deployed new PPMX cranes Photo: dol.gov Existing Bayonne Bridge to be raised 60

Existing Bayonne Bridge to be raised 60 feet by 2015 Photo: Ines Hegedus-Garcia

• Four of the top 5 U.S. cities for in investment were port cities, according to AFIRE (the Association for Foreign Investment in Real Estate): New York, San Francisco, Houston and Boston. Houston was also in the top five globally for the first time.

• Recovery in housing is an overlooked industrial demand driver that will gain additional traction in 2013.

demand driver that will gain additional traction in 2013. Geese migrating in their iconic “V formation”

Geese migrating in their iconic “V formation” use significantly less energy than flying solo

WHAT DO NATURE AND PHYSICS TELL US ABOUT THE “V FORMATION,” AND HOW DOES IT APPLY TO INDUSTRIAL REAL ESTATE?

Geese are iconic North American birds, most often seen migrating in

a signature V formation. This is no accident: the formation is more

aerodynamically efficient, reducing the energy the geese expend in flight

by as much as 50 percent. This is analogous to what’s happening in North

American industrial real estate with the growth in e-commerce and the expansion of the Panama Canal lock system. Just as Mother Nature aided geese in configuring their flight, so too is “Mother Intermodal” guiding distributors, producers, retailers and suppliers to re-engineer their supply chains.

The driving force behind demand for industrial real estate as we approach the first post-Panamax decade (2015–2025) is efficiency: reduced cost,

handling, and time. Several factors are forcing rapid evolution, eliminating the traditional choke points and “drag” in the system. Container ships two or three times the size of those in service today will soon make regular calls on North American ports, and not just on the West Coast. New hours-worked rules for over-the-road truck freight carriers will shift freight to intermodal and rail. Increasing demand for same-day delivery of goods purchased online will force more collaboration between air cargo and ocean container distribution in both port and air cargo markets, such

as Memphis (FedEx) and Louisville (UPS).

The effects of this natural streamlining process are already visible. This report examines key Q4 2012 metrics pertaining to absorption,

vacancy, rail carload volume and intermodal traffic, which define the new

V formation driving the future demand for North American industrial real

estate, and provide the real definition of INTERMODAL: Industrial Now Turns Especially to Rail to Move Ocean Distribution Across Land.

INDUSTRIAL OUTLOOK 2013

2H 2012 North American outlook reports focused on mixed economic signals and post-Panamax readiness of U.S. ports to understand why industrial real estate has continued to perform well. With the benefit of hindsight, it’s increasingly clear that the fiscal headwinds and unemployment riptides are not powerful enough to capsize continued industrial performance in 2013.

The driving force behind industrial development, leasing and transaction activity remains enhanced efficiencies: more movement of raw materials and processed goods, more global trade with emerging markets in Latin America, more e-commerce, and more domestic manufacturing. And more must be achieved with less: less time to move goods, less energy consumption and less labor-intensive handling of goods and materials at ports. These changes have resulted in ongoing port labor strife, which will continue as the implementation of these efficiencies results in job losses at ports and along the supply chain. Unlike the industrial boom periods in the 20th century that resulted in the construction of factories employing thousands of laborers, the modern manufacturing returning to the U.S. today is highly technical and automated, requiring a leaner and more educated workforce with skills in engineering, IT and robotics.

OF THE LEASES SIGNED THIS QUARTER*, DID MOST TENANTS ? Contract Hold Steady Expand 100%
OF THE LEASES SIGNED THIS QUARTER*, DID MOST TENANTS
?
Contract
Hold Steady
Expand
100%
4.8%
4.8%
3.2%
3.2%
5.3%
5.3%
8.3%
8.3%
90%
16.7%
16.7%
80%
38.1%
38.1%
42.9%
42.9%
70%
46.0%
46.0%
45.3%
45.3%
66.7%
66.7%
41.7%
41.7%
60%
50.0% 50.0%
50%
40%
30%
52.4%
38.1%
20%
41.7%
38.1%
38.7%
33.3%
10%
16.7%
0%
Midwest
Northeast
South
West
Canada
U.S.
N.A.
*Excluding renewals

CHARACTERIZE CURRENT INDUSTRIAL RENTS IN YOUR MARKET

N.A.

Canada

U.S.

Declining Bottoming No Clear Direction Increasing Peaking 1.5% 1.5% 19.7% 27.3% 48.5% 3 3.0% 3.0%
Declining
Bottoming
No Clear Direction
Increasing
Peaking
1.5% 1.5%
19.7%
27.3%
48.5%
3
3.0% 3.0%
9.1%
36.4%
27.3%
18.2%
21.8%
25.5%
52.7%
0%
20%
40%
60%
80%
100%
18.2% 21.8% 25.5% 52.7% 0% 20% 40% 60% 80% 100% HIGHLIGHTS | Q4 2012 | INDUSTRIAL
18.2% 21.8% 25.5% 52.7% 0% 20% 40% 60% 80% 100% HIGHLIGHTS | Q4 2012 | INDUSTRIAL
18.2% 21.8% 25.5% 52.7% 0% 20% 40% 60% 80% 100% HIGHLIGHTS | Q4 2012 | INDUSTRIAL
18.2% 21.8% 25.5% 52.7% 0% 20% 40% 60% 80% 100% HIGHLIGHTS | Q4 2012 | INDUSTRIAL
18.2% 21.8% 25.5% 52.7% 0% 20% 40% 60% 80% 100% HIGHLIGHTS | Q4 2012 | INDUSTRIAL

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

Right now, manufacturers and retailers are intensely focused on developing the most efficient path for goods and materials moving around the globe, traversing both ocean and land. This requires the integration of sophisticated logistics to reduce transportation, warehousing and handling costs, as well as reducing time to deliver finished goods to consumers. The logistics technology driving these efficiencies, along with rising energy costs and expanding trade routes made possible by the Panama Canal expansion, are changing where industrial real estate is most in demand.

For these reasons, traditional industrial economic indicators such as GDP, the Institute for Supply Management’s Purchasing Managers Index (PMI), and Federal Reserve District Bank manufacturing surveys, all fail to explain the boom in industrial real estate. This quarter’s analysis of industrial leasing, transaction and development activity highlights five emerging trends related to this observation, which will become more pronounced as we approach the first post-Panamax decade (2015–2025). These five trends will explain why the V formation for industrial real estate development and investment in 2013 is pointed toward port markets, inland distribution markets with dominant intermodal facilities (e.g., Atlanta, Memphis, Dallas, Denver, Los Angeles and Philadelphia), and a handful of dominant air cargo markets, such as Memphis and Louisville.

3-MONTH FORECAST FOR VACANCY LEVELS (relative to current quarter)

Up Same Down 100% 5.0% 8.3% 9.1% 9.0% 11.8% 90% 22.2% 33.3% 33.3% 80% 17.6%
Up
Same
Down
100%
5.0%
8.3%
9.1%
9.0%
11.8%
90%
22.2%
33.3%
33.3%
80%
17.6%
17.6%
30.0%
30.0%
23.6%
23.6%
26.9%
26.9%
11.1%
11.1%
70%
41.7%
41.7%
60%
50%
40%
70.6%
66.7%
66.7%
65.0%
67.3%
64.2%
30%
50.0%
20%
10%
0%
Midwest
Northeast
South
West
Canada
U.S.
N.A.
3-MONTH FORECAST FOR RENTS (relative to current quarter) Up Same Down 100% 90 % 16.7%
3-MONTH FORECAST FOR RENTS (relative to current quarter)
Up
Same
Down
100%
90
%
16.7%
33.3%
33.3%
80
%
40.3%
47.1%
45.5%
55.0%
70
%
60
%
50
%
75.0%
75.0%
40
%
66.7%
66.7%
66.7%
66.7%
30
%
58.2%
58.2%
52.9%
52.9%
54.5%
54.5%
45.0%
45.0%
20
%
10
%
8.3%
8.3%
0%
1.5%
1.5%
Midwest Northeast
South
W est
Canad a
U.S .
N .A.

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

Differentiating trends are:

• Port markets will distinguish themselves if they

• …are post-Panamax ready;

• …occupy a commodity or product niche, such as coal (Norfolk, VA), grain (Seattle), autos (Baltimore and Jacksonville), poultry or pharmacy (Savannah); or

• …are aligned with the national intermodal rail system; that is, physically connected to one of the seven Class-1 North American railroads. Tampa, Jacksonville, Charleston, Savannah, Philadelphia, Mobile, and New Orleans are examples along the East and Gulf coasts.

• Intermodal and logistics differentiate top-tier inland distribution MSAs (e.g., Atlanta, Memphis, Louisville, Columbus, Indianapolis, Dallas, Kansas City and Denver) from those that will be ancillary to the national supply chain (e.g., Orlando, Birmingham, Charlotte, Las Vegas and California’s Central Valley).

• Inland waterways are diminishing in importance as a means of moving bulk cargo, due to the inefficiency and unreliability of this mode of transportation owing to unpredictable drought or flood.

• Changes to environmental and labor regulations are driving cargo away from trucking and toward rail.

• Air cargo facilities are vital to e-commerce. In 3–5 years, there will be at most a half-dozen dominant U.S. air cargo markets. Candidates include Memphis, Louisville, Columbus, Miami, New York, Los Angeles, Seattle and Denver. Because of the costs involved, air cargo in the U.S. will follow the same hub-and-spoke model adopted by passenger air carriers to maximize traffic.

MEMPHIS NOW #1 IN AIR GLOBAL CARGO According to Airports Council International, Memphis in February overtook Hong Kong and Shanghai to top the list of Asian, European and North American air cargo markets, as measured by metric tons of air cargo handled annually. With its BNSF intermodal facility, Colliers recognizes Memphis as the top North American market for e-commerce.

annually. With its BNSF intermodal facility, Colliers recognizes Memphis as the top North American market for

BEHIND THE STATISTICS & BEYOND THE BASICS

Colliers monitors industrial property conditions in 75 North American markets from Miami to Montreal, totaling 16.1 billion square feet of inventory. Approximately 90 percent (14.4 billion square feet) of this inventory is located in the United States.

The West and Midwest regions constitute approximately half of the North American industrial warehouse space (8.0 billion square feet), and also accounted for approximately half of the annual net leasing activity in North America. The South is the next largest region, with 4.2 billion square feet of industrial warehouse space, or 26 percent of the North American inventory. The expansion of the Panama Canal, and the addition of at least five more Panamax-ready ports to the East and Gulf coasts, will only enhance the market share of key inland and port distribution markets in the Southeast and Southwest by 2015.

NORTH AMERICAN INDUSTRIAL OVERVIEW | Q4 2012

 

MEASURE

NORTH AMERICA

CANADA

UNITED STATES

WEST/MIDWEST

SOUTH

NORTHEAST

# of Markets

75

12

63

33

21

9

Inventory (MSF)

16,121.4

1,720.4

14,401.0

8,018.6

4,159.8

2,222.6

%

of N.A. Inventory

100.0

10.7

89.3

49.7

25.8

13.8

New Supply (MSF)

27.7

3.7

24.0

11.6

10.5

2.0

%

of N.A. New Supply

100.0

13.2

86.8

41.7

37.8

7.3

Vacancy (%)

8.42

4.25

8.92

8.37

9.57

9.67

Absorption (MSF)

70.9

6.9

64.0

36.1

21.9

6.0

%

of N.A. Absorption

100.0

9.7

90.3

50.9

30.9

8.5

Leadership Markets

 

Toronto—tops in absorption; and then Montreal and Calgary (lowest vacancy rates)

Detroit, Los Angeles, Dallas, Memphis, Philadelphia, Phoenix, Louisville and Atlanta in absorption; and then Southern California and Los Angeles, Houston, Indianapolis and Seattle with respect to lowest vacancy

Los Angeles, San Diego, Bakersfield, Denver, Seattle, Chicago, Columbus, Detroit and Indianapolis with >1.0 MSF of net absorption Q42012

Atlanta, Charlotte, Dallas, Houston, Greenville SC, Louis- ville, Memphis, Nashville and Richmond with 1.0 MSF net absorption in Q42012

Philadelphia, New Jersey – Central and Washington, DC with >1.0 MSF net absorption in Q4

Laggard Markets

 

Halifax and Waterloo with vacancy rates >6.5%

NE (Hartford, Boston, and Long Island). Central Valley of California (Fresno, Stockton and secondary SE markets inland from ports and lacking intermodal facilities (Birmingham and Orlando)

Central Valley of California and Omaha with <250k SF net absorption in Q4 2012

Birmingham, Savannah, Orlando, and Little Rock with <250k SF in net absorption in Q4 2012

Hartford, Boston and Long Island with negative absorption in Q4 0212

2012 finished with progress on all fronts.

• North American and U.S. industrial vacancy rates below 9.0 percent (8.42% and 8.92%, respectively)

• Q4 was the best quarter since Q3 2007 and the financial crisis, with $36.9 billion in transactions, making investor demand for industrial real estate second only to multifamily

• Lease activity surged at year-end, with 45% of 2012’s 163.5 MSF of net absorption coming in Q4

• Addition of another post-Panamax port (Baltimore) and another major intermodal facility (Philadelphia) Following four consecutive quarters of improving demand metrics with limited new supply, the overall picture is of a property type in balance. As a result, new construction is both warranted and feasible.

U.S. INDUSTRIAL MARKET | Q4 2010–Q4 2012 70.0 14.0 60.0 10.80 12.0 10.56 10.29 10.01
U.S. INDUSTRIAL MARKET | Q4 2010–Q4 2012
70.0
14.0
60.0
10.80
12.0
10.56
10.29
10.01
9.77
9.68
9.43
50.0
8.928.92
10.0
8.42
8.42
40.0
8.0
30.0
6.0
20.0
4.0
10.0
2.0
-
-
Q4
Q1 2011
Q2
Q3
Q4
Q1 2012
Q2
Q3
Q4
Absorption MSF
Completions MSF
Vacancy %
Vacancy %

Vacancy From a regional perspective, Canada has the lowest average vacancy rate in North America at 4.25 percent; the Northeast U.S. has the highest, at 9.67 percent. The West and Midwest are the only two U.S. regions with vacancy rates below 9.0 percent—7.88 percent and 8.79 percent, respectively.

 

US

CAN

NA

Vacancy Rate

8.92%

4.25%

8.42%

Change from Q3 2012

-0.31%

-0.24%

-0.30%

Drilling deeper into the five North American office regions, vacancy improved the most in the primary port and inland distribution markets with large intermodal facilities. In Canada, among the three large industrial markets (at least 100 MSF of inventory), the vacancy rates are lowest in Vancouver (3.67%), Toronto (4.13%) and Montreal (4.34%). There are 15 U.S. markets with a vacancy rate below 7.5 percent, approximately 100 basis points below the North American average. It is important to note that 13 of the 15 U.S. markets with the lowest industrial vacancy rates are top-20 North American port or top-10 inland distribution markets with major intermodal rail.

inland distribution markets with major intermodal rail. HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA
inland distribution markets with major intermodal rail. HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA
inland distribution markets with major intermodal rail. HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA
inland distribution markets with major intermodal rail. HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA
inland distribution markets with major intermodal rail. HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

TOP 20 NORTH AMERICAN INDUSTRIAL MARKETS | VACANCY

   

Q4

 

VACANCY

RANKING

 

MSA

VACANCY

RATE (%)

MARKET

PROFILE

       

3rd largest

1

CANADA

Vancouver

3.67

Canadian

industrial market

     

Largest Canadian

2

 

Toronto

4.13

industrial market

     

2nd largest

3

Montreal

4.34

Canadian

industrial market

     

4th largest

4

Calgary

5.05

Canadian

industrial market

 

UNITED STATES

   

Top-20 North

5

Honolulu

3.75

American port

     

Busiest North

6

Los Angeles

4.21

American TEU

container port

7

Orange County

4.90

-

8

 

Houston

5.15

Busiest Gulf Coast port

     

Developing

9

Indianapolis

5.26

Canadian

Intermodal link

10

Long Island

5.59

Port of New York influence

     

Top-20 North

11

Seattle

5.82

American port

     

Top-5 North

12

LA Inland Empire

6.45

American

intermodal facility

13

Milwaukee

6.51

Key Great Lakes region port

     

Top-20 North

14

Miami

6.57

American port to Latin America

     

Top-10 North

15

Kansas City

6.72

American

intermodal facility

     

Top-20 North

16

Portland

7.18

American port; autos & agriculture

17

Grand Rapids

7.29

Proximity to Great Lakes ports & rail

18

West Palm Beach

7.29

Cruise ship port influence

19

Denver

7.45

Top-10 intermodal & air cargo

 

North American

   

Average

7.50

20

Minneapolis

8.12

Intermodal and rail linkage to Canada

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

Absorption The final tally on 2012 net industrial absorption was not in the cards at mid-2012, when it appeared that retailers and manufacturers were pulling back from warehouse leasing activity and capital expenditures for supply-chain makeover. However, despite the market’s anxiety over the November 2012 election and the Fiscal Cliff, net industrial absorption had its best performance in 2012 since the 2008–2009 financial crisis, and Q4 net absorption accounted for 45 percent of aggregate 2012 net leasing activity.

Which markets outperformed and why? As was revealed by the year-end vacancy statistics, there is another strong correlation to port and intermodal markets with two wrinkles: Detroit (influenced by the auto recovery), and Phoenix (influenced by the housing recovery). The fiscal headwinds and unemployment riptides are not powerful enough to capsize continued industrial performance because development and leasing activity is fueled by distributors, manufacturers, retailers and shippers who need to re-engineer their supply chain to gain efficiencies required in the post-Panamax era, just two years away. Eight of the top ten U.S. markets for both Q4 and CY 2012 absorption were top-ten North American port or intermodal industrial markets.

TOP 10 U.S. INDUSTRIAL MARKETS | ABSORPTION

 
 

MSA

Q4 2012 (MSF)

MSA

CY 2012 (MSF)

1

Chicago

7.006

Chicago

13.438

(Intermodal)

(Intermodal)

 

Detroit

     

2

(Auto +

Housing)

4.685

Dallas/

Ft. Worth

9.728

(Intermodal)

 

Los Angeles–

     

3

Inland Empire

(Intermodal)

4.405

Detroit

9.169

(Auto-recovery)

 

Dallas/

     

4

Ft. Worth

(Intermodal)

3.223

Los Angeles–

Inland Empire

8.470

(Intermodal)

5

Memphis

2.905

Los Angeles–

8.375

(Intermodal)

Coastal

(Port)

 

Philadelphia

     

6

(Port +

Intermodal)

2.900

Atlanta

7,400

(Intermodal)

 

Phoenix

   

6.245

7

(Housing)

2.519

Houston

(Port)

8

Los Angeles

2.235

Phoenix

5.137

(Port)

(Housing Recovery)

9

Louisville

2.227

Columbus

4.916

(Air Cargo)

(Air Cargo)

10

Richmond

2.223

Seattle

3.916

(Port)

(Port)

Looking forward to 2013, the only brake on industrial leasing activity in key port and intermodal markets will be the delayed delivery of new space under construction: Los Angeles, Houston, Seattle and Memphis can’t complete new space fast enough to keep pace with demand. Market forces will see disproportionately higher 2H 2013 net leasing activity than 1H 2013, as was the case in 2012.

Construction Activity There is no change from the prior North American Outlook report. Bottom line: there remains a dearth of new speculative warehouse development. Construction activity is still subdued, and predominantly driven by owner-users expanding e-commerce capabilities by redeveloping their supply chain. National retailers such as Amazon, Family Dollar, FedEx, Home Depot, Lowes, Publix, Target, Tractor Supply and Whole Foods are constructing in excess of 9.0 MSF of modern distribution and logistics centers from coast to coast. These new centers account for approximately 30 percent of the 32 MSF of new warehouse construction under way at year-end 2012. Another 30 percent of this total is for modern parts and distribution centers for manufacturers, such as Boeing, Volkswagen and Whirlpool.

ABSORPTION (SF) | SELECT U.S. MARKETS | Q4 2012

 

Millions

0.0

2.0

4.0

6.0

8.0

Chicago, IL Detroit, MI Los Angeles - Inland Empire, CA Dallas-Ft. Worth, TX Los Angeles,
Chicago, IL
Detroit, MI
Los Angeles - Inland Empire, CA
Dallas-Ft. Worth, TX
Los Angeles, CA
Atlanta, GA
Indianapolis, IN
New Jersey - Central
New Jersey - Northern
Savannah, GA

ABSORPTION (SF) | CANADIAN MARKETS | Q4 2012

Toronto, ON Vancouver, BC Edmonton, AB Regina, SK Saskatoon, SK Ottawa, ON Waterloo Region, ON Victoria, BC Montréal, QC Calgary, AB Halifax, NS Winnipeg, MB

-0.5 0.0 0.5

1.0

1.5

2.0 2.5

3.0 3.5

Millions

4.0 4.5

5.0 5.5

BC Montréal, QC Calgary, AB Halifax, NS Winnipeg, MB -0.5 0.0 0.5 1.0 1.5 2.0 2.5

The 5 states with the most warehouse construction under way, along with their largest distribution or logistics project:

   

TOTAL NEW

 

STATE

CONSTRUCTION

 

LARGEST DISTRIBUTION/ LOGISTICS PROJECT U/C

UNDERWAY (MSF)

1

Georgia

3.4

1.4

MSF by Lowes

 

2 Tennessee

1.8

1.0

MSF by Amazon

 

3 Ohio

1.7

800k SF by Rubbermaid ; 400k by Target

4/5

California

1.5

300,000 SF by Chino

4/5

Arizona

1.5

600,000 SF by Estrela Logistics

Capital for new construction is scarce, as banks remain on the sidelines unless the warehouse project is a build-to-suit for owner occupancy or is pre-leased to ensure break-even debt service. The risk of overbuilding is low, given the scarcity of debt capital for speculative construction and the limited degree of speculative warehouse construction under way at year-end 2012 (less than 10 MSF), so prospects for further improvement in both vacancy and rental rates remain favorable for 2013.

in both vacancy and rental rates remain favorable for 2013. HIGHLIGHTS | Q4 2012 | INDUSTRIAL
in both vacancy and rental rates remain favorable for 2013. HIGHLIGHTS | Q4 2012 | INDUSTRIAL
in both vacancy and rental rates remain favorable for 2013. HIGHLIGHTS | Q4 2012 | INDUSTRIAL
in both vacancy and rental rates remain favorable for 2013. HIGHLIGHTS | Q4 2012 | INDUSTRIAL
in both vacancy and rental rates remain favorable for 2013. HIGHLIGHTS | Q4 2012 | INDUSTRIAL

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

BURGEONING OPPORTUNITY IN DISTRIBUTION FOR HEALTHCARE United Parcel Service (UPS) has jumped out as a

BURGEONING OPPORTUNITY IN DISTRIBUTION FOR HEALTHCARE United Parcel Service (UPS) has jumped out as a leader in developing a healthcare distribution network. Approximately 6.0 MSF of distribution space is dedicated to healthcare distribution in the U.S., Canada and Europe, and UPS is adding 800,000 SF more in 2013—the largest portion in Atlanta. In the U.S., UPS is focused on growing this distribution niche in Atlanta, Louisville, Mira Loma, CA and Reno. In light of the aging U.S. population and a rapidly growing healthcare industry, healthcare distribution is certainly a niche to monitor. However, its higher regulatory scrutiny and unique design requirements (such as temperature-controlled facilities) are steep barriers to entry for those lacking capital and knowledge of the healthcare industry.

However, rising construction costs are a concern that spans all commercial property types. It may surprise many to learn that construction costs never actually declined during the 2008–2009 financial crisis and the ensuing recession. As documented by ENR Construction, costs have risen 17% since the end of 2007, and are up over 5.0 percent since February 2011. Investors and developers considering new construction investments should budget construction cost increases at double the CPI for 2013 and 2014, due to pressures on labor and materials.

ENGINEERING NEWS-RECORD’S CONSTRUCTION COST INDEX

 

YEAR

JAN

FEB

 

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

 

AVG

2013

9437

9453

 

NOTE: CONSTRUCTION COSTS NEVER DROPPED POST-2007 & ARE RISING AT A FASTER PACE.

 

2012

9176

9198

2012 9176 9198 9268 9273 9290 9291 9324 9351 9341 9376 9398 9412 9308

9268

9273

9290

9291

9324

9351

9341

9376

9398

9412

2012 9176 9198 9268 9273 9290 9291 9324 9351 9341 9376 9398 9412 9308

9308

2011

8938

8998

 

9011

9027

9035

9053

9080

9088

9116

9147

9173

9172

 

9070

2010

8660

8672

 

8671

8677

8761

8055

8844

8837

8836

8921

8951

8952

 

8799

2009

8549

8533

 

8534

8528

8574

8578

8566

8564

8586

8596

8592

8641

 

8570

2008

8090

8094

 

8109

8112

8141

8185

8293

8362

8557

8623

8602

8551

 

8310

2007

7880

7880

 

7856

7865

7942

7939

7959

8007

8050

8045

8092

8089

 

7966

2006

7660

7689

 

7692

7695

7691

7700

7721

7722

7763

7883

7911

7888

 

7751

2005

7297

7298

 

7309

7355

7398

7415

7422

7479

7540

7563

7630

7647

 

7446

2004

6825

6862

 

6957

7017

7065

7109

7126

7188

7298

7314

7312

7308

 

7115

2003

6581

6640

 

6627

6635

6642

6694

6695

6733

6741

6771

6794

6782

 

6694

2002

6462

6462

 

6502

6480

6512

6532

6605

6592

6589

6579

6578

6563

 

6538

2001

6281

6272

 

6279

6286

6288

6318

6404

6389

6391

6397

6410

6390

 

6343

2000

6130

6160

 

6202

6201

6233

6238

6225

6233

6224

6259

6266

6283

 

6221

INDEX METHODOLOGY: 200 hours of common labor at the 20-city average of common labor rates, plus 25 cwt of standard structural steel shapes at the mill price prior to 1996 and the fabricated 20-city price from 1996, plus 1.128 tons of portland cement at the 20-city price, plus 1,088 board-ft of 2x4 lumber at the 20-city price.

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

Transaction Activity Industrial warehouse property transactions were up 4 percent in 2012 to $36.9 billion, despite a dearth of portfolios and investment-grade warehouses for sale. Approximately 37 percent of these transactions (13.5 billion) occurred in Q4 2012, making it the most active quarter for industrial warehouse transactions since Q3 2007. Cap rates continue to compress, and prices were up 6 percent over 2011, according to Real Capital Analytics Industrial Year in Review.

Capital Markets What is better than improving office property type fundamentals? For those that purchased any of the 4,000 industrial warehouse properties that traded in 2012, the answer is availability of capital. Domestic and foreign sources are flush with capital ready to invest in tangible assets like real estate, that can offer 2.5 to 3.0 times the yield offered by the U.S. government’s 10-year Treasury bond. And, the CMBS debt markets are opening up again after four consecutive years of annual new issuance below $50 billion. Underwriting terms and pricing spreads have also compressed in favor of borrowers. Improving market conditions have enabled even properties with elevated vacancy rates to become financeable again due to the low DSCR hurdle provided by sub-5.0 percent interest rates and 90 percent LTVs. Declining CMBS delinquency rates have further aided new issuance interest, and have CMBS investors enthusiastic about 2013 new issuance increasing 50 percent over 2012’s $50 billion level to 75 billion. If you have tenants, and can meet a 1.4 DSCR using a 4.5% loan coupon, the capital markets are once again open to refinance your industrial building.

PERCENTAGE 30+ DAYS DELINQUENT BY PROPERTY TYPE

 
 

JAN ‘13

DEC ‘12

NOV ‘12

3 MON

6 MON

1 YEAR

INDUSTRIAL

11.32

11.24

11.48

11.53

11.72

12.14

LODGING

11.77

11.73

12.24

11.24

13.06

12.09

MULTIFAMILY

13.43

13.98

14.21

14.26

15.69

15.39

OFFICE

10.48

10.66

10.37

10.20

10.69

8.90

RETAIL

7.79

7.62

7.75

8.03

8.03

7.88

Source: Trepp – January 2013 CMBS Delinquency Report

CONCLUSION

Let’s return to the question posed at the beginning of this report:

Q. What do nature and physics tell us about the V formation, and

how is it applicable to industrial real estate?

A. It tells us that it is the most efficient pattern of movement that

expends 50 percent less energy.

The North American industrial markets are re-engineering their supply chains and distribution channels with a V formation in mind—and a goal of achieving enhanced efficiencies in both costs and time. The growth in e-commerce and expansion of the Panama Canal lock system are converging to force manufacturers, retailers, and suppliers to make large CapEx investments in new facilities, particularly in markets aligned with post-Panamax ports, with intermodal facilities along one or more Class-1 railroads, and in proximity to the most efficient overnight air cargo airports.

$@

to the most efficient overnight air cargo airports. $@ Industrial markets V formation The driving force
to the most efficient overnight air cargo airports. $@ Industrial markets V formation The driving force

Industrial markets V formation

The driving force behind demand for industrial real estate as we approach the first post-Panamax decade is increased efficiency, in order to offset global competition and pressure of a global economic climate mired in debt, and likely to see ongoing tepid GDP growth.

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA UNITED STATES | INDUSTRIAL SURVEY MARKET
HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA UNITED STATES | INDUSTRIAL SURVEY MARKET
HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA UNITED STATES | INDUSTRIAL SURVEY MARKET
HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA UNITED STATES | INDUSTRIAL SURVEY MARKET
HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA UNITED STATES | INDUSTRIAL SURVEY MARKET

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

UNITED STATES | INDUSTRIAL SURVEY

MARKET

INVENTORY DEC. 31, 2012 (SF)

NEW CONSTRUCTION Q4 2012 (SF)

CURRENTLY UNDER

CONSTRUCTION

(SF)

ABSORPTION Q4 2012 (SF)

VACANCY RATE SEPT. 30, 2012 (%)

VACANCY RATE DEC. 31, 2012 (%)

NORTHEAST

Baltimore, MD

225,922,841

67,120

392,620

777,065

10.53

10.21

Boston, MA

154,079,047

128,874

1,109,585

(263,862)

17.14

17.38

Hartford, CT

97,321,923

224,061

-

(273,114)

8.93

9.19

Long Island, NY

161,321,096

-

-

(385,086)

5.36

5.59

New Jersey – Central

353,576,306

287,800

1,027,000

1,032,423

9.39

9.17

New Jersey – Northern

374,424,353

-

-

824,363

8.55

8.35

Philadelphia, PA

409,316,988

1,265,000

2,204,530

2,900,169

10.18

9.75

Pittsburgh, PA

168,333,439

-

146,313

191,368

8.32

8.21

Washington, DC

278,296,443

49,600

1,933,098

1,223,202

11.14

10.71

Northeast Total

2,222,592,436

2,022,455

6,813,146

6,026,528

9.87

9.67

SOUTH

Atlanta, GA

608,573,705

1,370,640

4,521,578

1,791,217

12.71

12.41

Birmingham, AL

110,692,974

-

150,000

136,337

9.57

9.39

Charleston, SC

32,042,029

200,000

768,000

338,899

10.86

10.36

Charlotte, NC

295,314,817

160,988

509,765

1,615,340

12.28

11.78

Columbia, SC

37,853,794

-

-

58,608

8.90

8.78

Dallas-Ft. Worth, TX

717,071,304

1,693,118

1,279,743

3,223,281

9.72

9.48

Ft. Lauderdale-Broward, FL

123,353,931

-

381,969

(14,666)

8.34

8.35

Greenville/Spartanburg, SC

183,028,727

1,015,740

-

1,730,134

9.61

9.16

Houston, TX

482,535,159

949,497

2,554,598

1,440,472

5.26

5.15

Jacksonville, FL

121,961,127

41,808

-

512,271

10.47

10.08

Little Rock, AR

45,018,927

18,376

497,443

59,518

11.29

11.17

Louisville, KY

180,269,470

16,000

-

2,227,336

10.19

8.96

Memphis, TN

217,057,417

1,372,305

1,219,892

2,905,072

13.25

12.46

Miami, FL

220,661,704

53,000

1,008,421

858,752

6.94

6.57

Nashville, TN

88,921,700

1,300,000

-

1,369,010

9.03

8.82

Orlando, FL

145,229,723

87,814

-

136,471

10.25

10.21

Raleigh, NC

120,097,770

36,554

135,696

254,180

10.42

10.23

Richmond, VA

112,863,513

2,146,494

482,489

2,223,096

10.24

9.98

Savannah, GA

44,421,300

-

881,000

144,657

12.16

11.84

Tampa Bay, FL

212,832,724

-

35,519

734,755

9.70

9.36

West Palm Beach, FL

60,002,683

-

20,900

186,192

7.60

7.29

South Total

4,159,804,498

10,462,334

14,447,013

21,930,932

9.90

9.57

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

UNITED STATES | INDUSTRIAL SURVEY

(continued)

MARKET

INVENTORY DEC. 31, 2012 (SF)

NEW CONSTRUCTION Q4 2012 (SF)

CURRENTLY UNDER

CONSTRUCTION

(SF)

ABSORPTION Q4 2012 (SF)

VACANCY RATE SEPT. 30, 2012 (%)

VACANCY RATE DEC. 31, 2012 (%)

MIDWEST

Chicago, IL

1,310,785,800

900,153

4,768,149

7,006,883

10.04

9.53

Cincinnati, OH

274,600,585

-

553,338

856,364

9.53

9.22

Cleveland, OH

477,772,867

153,492

22,538

738,868

9.18

9.05

Columbus, OH

211,821,516

448,665

924,103

1,455,132

9.11

8.76

Detroit, MI

556,741,643

1,640,405

-

4,685,051

12.03

11.45

Grand Rapids, MI

108,946,869

-

285,000

370,606

7.56

7.29

Indianapolis, IN

282,953,005

1,306,295

2,303,616

1,091,779

5.21

5.26

Kansas City, MO-KS

234,052,197

212,441

2,466,743

761,402

6.96

6.72

Milwaukee, WI

223,336,664

322,050

-

358,540

6.57

6.51

Minneapolis/St. Paul, MN

252,239,046

647,000

1,585,000

764,750

8.35

8.12

Omaha, NE

67,749,057

-

35,636

153,296

5.41

5.09

St. Louis, MO

260,993,881

-

209,050

487,411

8.61

8.42

Midwest Total

4,261,993,130

5,630,501

13,153,173

18,730,082

9.13

8.79

WEST

Bakersfield, CA

33,401,923

495,000

291,085

1,026,063

4.45

2.80

Boise, ID

35,010,541

169,680

210,000

643,826

10.92

9.51

Denver, CO

215,855,262

340,928

855,271

1,298,425

7.86

7.45

Fairfield, CA

46,831,953

-

48,133

514,997

12.40

11.30

Fresno, CA

48,600,000

-

-

214,000

9.70

9.26

Honolulu, HI

39,179,616

-

-

205,646

4.27

3.75

Las Vegas, NV

109,030,779

-

658,320

284,707

16.05

15.53

Los Angeles – Inland Empire, CA

386,235,800

1,759,500

8,741,800

4,405,800

6.89

6.45

Los Angeles, CA

882,677,700

848,500

1,608,600

2,235,500

4.35

4.21

Oakland, CA

141,540,855

-

517,575

99,250

8.46

8.23

Orange County, CA

200,123,900

-

183,200

(576,500)

4.60

4.90

Phoenix, AZ

272,634,685

2,008,075

4,683,704

2,519,378

13.09

12.81

Pleasanton/Walnut Creek, CA

33,187,680

-

-

918,170

12.99

10.22

Portland, OR

200,393,745

-

2,170,447

186,166

7.27

7.18

Reno, NV

87,415,483

-

-

399,516

11.43

10.97

Sacramento, CA

188,076,142

-

235,553

720,631

13.30

12.92

San Diego, CA

186,979,756

129,845

172,656

1,031,268

10.36

9.87

San Francisco Peninsula, CA

41,071,873

-

-

(242,772)

9.26

9.85

San Jose/Silicon Valley

251,868,566

99,800

111,100

(77,141)

10.69

10.73

Seattle/Puget Sound, WA

262,474,244

-

693,758

1,150,355

6.50

5.82

Stockton/San Joaquin County, CA

94,049,012

29,095

-

377,094

13.77

13.45

West Total

3,756,639,515

5,880,423

21,181,202

17,334,379

8.20

7.88

U.S. TOTAL

14,401,029,579

23,995,713

55,594,534

64,021,921

9.22

8.92

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA UNITED STATES | INDUSTRIAL SURVEY |

HIGHLIGHTS | Q4 2012 | INDUSTRIAL | NORTH AMERICA

UNITED STATES | INDUSTRIAL SURVEY | SALES PRICE AND CAP RATE AS OF DECEMBER 2012

MARKET

SALES PRICE

(USD PSF)

CAP RATE

(%)

2012 M A R K E T SALES PRICE (USD PSF) CAP RATE (%) VACANCY FORECAST
2012 M A R K E T SALES PRICE (USD PSF) CAP RATE (%) VACANCY FORECAST
2012 M A R K E T SALES PRICE (USD PSF) CAP RATE (%) VACANCY FORECAST
2012 M A R K E T SALES PRICE (USD PSF) CAP RATE (%) VACANCY FORECAST

VACANCY FORECAST

(3 MONTHS)

ABSORPTION FORECAST

(3 MONTHS)

RENT FORECAST

(3 MONTHS)

NORTHEAST

Baltimore, MD

60.74

6.36

Baltimore, MD 60.74 6.36 

Baltimore, MD 60.74 6.36 

Boston, MA

65.00

 
Boston, MA 65.00   

Boston, MA 65.00   

Hartford, CT

38.00

8.50

Hartford, CT 38.00 8.50 

Hartford, CT 38.00 8.50 

Long Island, NY

67.44

7.67

Long Island, NY 67.44 7.67 Close to zero

Close to zero

Long Island, NY 67.44 7.67 Close to zero

New Jersey – Central

59.00

6.30

New Jersey – Central 59.00 6.30 

New Jersey – Central 59.00 6.30 

New Jersey – Northern

67.00

 
New Jersey – Northern 67.00   

New Jersey – Northern 67.00   

Philadelphia, PA

58.95

7.84

Philadelphia, PA 58.95 7.84 

Philadelphia, PA 58.95 7.84 

Pittsburgh, PA

50.00

7.75

Pittsburgh, PA 50.00 7.75 

Pittsburgh, PA 50.00 7.75 

Washington, DC

151.43

6.52

Washington, DC 151.43 6.52 

Washington, DC 151.43 6.52 

Northeast Total*

68.62

7.28

SOUTH

Atlanta, GA

38.06

7.90

Atlanta, GA 38.06 7.90 

Atlanta, GA 38.06 7.90 

Birmingham, AL

         

Charleston, SC

46.00

7.50

Charleston, SC 46.00 7.50 

Charleston, SC 46.00 7.50 

Charlotte, NC

         

Columbia, SC

   
Columbia, SC     

Columbia, SC     

Dallas-Ft. Worth, TX

60.00

7.30

Dallas-Ft. Worth, TX 60.00 7.30 

Dallas-Ft. Worth, TX 60.00 7.30 

Ft. Lauderdale-Broward, FL

51.00

4.16

Ft. Lauderdale-Broward, FL 51.00 4.16 

Ft. Lauderdale-Broward, FL 51.00 4.16 

Greenville/Spartanburg, SC

   
Greenville/Spartanburg, SC     

Greenville/Spartanburg, SC     

Houston, TX

63.00

7.90

Houston, TX 63.00 7.90 

Houston, TX 63.00 7.90 

Jacksonville, FL

32.00

9.00

Jacksonville, FL 32.00 9.00 

Jacksonville, FL 32.00 9.00 

Little Rock, AR

65.45

9.00

Little Rock, AR 65.45 9.00 Close to zero

Close to zero

Little Rock, AR 65.45 9.00 Close to zero

Louisville, KY

         

Memphis, TN

32.50

7.75

Memphis, TN 32.50 7.75 

Memphis, TN 32.50 7.75 

Miami, FL

85.00

7.00

Miami, FL 85.00 7.00 

Miami, FL 85.00 7.00 

Nashville, TN

35.00

10.32

Nashville, TN 35.00 10.32 

Nashville, TN 35.00 10.32 

Orlando, FL

52.00

7.50

Orlando, FL 52.00 7.50 

Orlando, FL 52.00 7.50 

Raleigh, NC

         

Richmond, VA

   
Richmond, VA     Close to zero

Close to zero

Richmond, VA     Close to zero

Savannah, GA

36.00

8.50

Savannah, GA 36.00 8.50 Close to zero

Close to zero

Savannah, GA 36.00 8.50 Close to zero

Tampa Bay, FL

30.09

8.75

Tampa Bay, FL 30.09 8.75 

Tampa Bay, FL 30.09 8.75 

West Palm Beach, FL

85.00

6.94

West Palm Beach, FL 85.00 6.94 

West Palm Beach, FL 85.00 6.94 