Manufacturers to Pay More for Industrial Space as Vacancy Rates Plummet

San Francisco and Los Angeles boast lowest vacancy rates in the US.

Everything has an upside and a downside. The Industrial Real Estate Market proves that.

With economic recovery, continued growth in e-commerce, steady housing markets and a resurgence in domestic manufacturing, demand is exceeding supply in the US.

Things are looking so good for manufacturers that vacancy rates are hitting their lowest marks since 2011.

The San Francisco metro area boasts the lowest vacancy rate in the nation at 2.3 percent. Coming in second place, the Greater Los Angeles region stands at 3.3 percent.

On the downside, these low vacancy rates have allowed landlords to raise the cost of rent across many markets.

Average direct rents have risen 3.6 percent since 2014 and 11 percent since 2011. Experts anticipate rates will rise another five percent by the end of 2015, followed by another 10 percent over the next three years.

Markets in Silicon Valley and Oakland lead the nation at 18.3 percent and 14.1 percent rates of annual rent growth respectively, according to findings in Cushman & Wakefield’s first quarter results.

“Strong market demand for high-quality space has led to tight supply,” but “even with the influx of new construction, increased demand should further reduce our sector’s vacancy rates in the near term.” says John Morris, the Rosemont, IL-based leader of the real estate firm’s industrial services group. 

Over the last two years developers have been cautious concentrating on build-to-suits. But last year more than half of the nation’s new industrial developments were done on a speculative basis, increasing to 71 percent of the space currently under construction.

“The market ended last year with 105 million square feet under construction and about 340 million square feet leased,” says Morris. “This indicates a marked difference in which demand continues to surpass supply in almost every region.”

Morris believes the industrial real estate market will continue to perform strongly despite rising rents.

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