Big Box Sector Finishes Historic Year

Article originally posted on Globe St. on March 1, 2017

The North American big-box sector just finished a historic year, as speculative deliveries soared past build-to-suits, and users quickly moved to fill in much of the new space, according to Colliers International. The company just released its latest Big Box Market Report, a series of studies that track the sector, comprised of distribution buildings with more than 300,000 square feet and clear heights of 28’ or greater. The researchers believe the splendid run of expansion will continue into 2017, as more companies seek to reconstruct their supply chains and either occupy new fulfillment centers or hire 3PL firms to move their product.

“In 2016, robust demand created record levels of development, which is now in equilibrium with absorption and providing a healthy amount of options for occupiers,” the firm says. Developers completed about 87 million square feet of new big-box space, and 67% of that work was done on a speculative basis. It was a big boost over 2015, when builders finished 65 million square feet.

But leasing activity in 2016 has kept pace with new development. Users leased 105 million square feet last year, an increase of 9.6% over 2015. And even with the record amount of new construction, the overall vacancy rate only rose 0.2 percentage points to 7.7%.

Rental rates also followed an upward trajectory throughout much of the year, Colliers found. By the end of 2016, effective rents reached $4.66, a 10.9% increase over 2015. Still, all that new product hitting the market did have an impact, and in the last quarter effective rents began leveling off.

Not surprisingly, institutional investors have responded to this intense activity. The average cap rate remained at a low 5.3%, and in Chicago, one of the top core markets, it sank to just 5.0%. And Colliers expects the popularity of industrial big-box product with domestic and international investors to continue throughout the coming year.

“With key demand drivers intact, we expect that strong big-box fundamentals will continue in 2017,” the report concludes. And even though policy changes initiated from Washington could alter the outlook in both positive and negative ways, “it’s clear that e-commerce will endure as a driving force of the industrial real estate market for years to come. Yet in many ways, such as supply chain management, e-commerce is still in its infancy and there is still plenty of room for even greater impact on the industrial market.”