The Port of Los Angeles rose to the top of CBRE’s third-annual North American Seaports & Logistics Index, aided by its status as the nation’s strongest logistics real estate market and by its healthy cargo volume growth.
After several years of strong growth, activity at the major North American ports has been somewhat stagnant due to slow global trade and disruptions in the shipping industry. However, recent trends suggest that this slowdown is temporary and growth is returning.
The expanded Panama Canal has been open for just over a year with mixed results. Larger ships are passing through the canal to U.S. East Coast ports, but the number of transits has been lower than expected. The opening of the new, higher Bayonne Bridge in New York will facilitate more port calls by mega ships on the East Coast.
For logistics real estate, the resumption of growth in cargo volumes, increased competition between the coasts, and additional mega ships transiting the Panama Canal will create additional flexibility in the supply chain and more location alternatives for distribution and warehouse users.
The capital markets environment remains strong overall, but is less dynamic than the cyclical high reached in 2015. Cyclical-low unemployment rates and healthy property fundamentals have kept Orange County as a particularly attractive market for investors. Capital flows have shifted from crowded markets like Los Angeles into secondary and tertiary markets as investors explore alternative sectors and regions for higher yields. Overall, volume remains elevated and pricing is stable.
Tight pricing and limited availability of investable stock dampened total acquisitions activity in Los Angeles, but activity in Orange County picked up from last year. In H1 2017, investment reached $3.5 billion, a year-over-year increase of 12.1%. Individual asset sales, the best indicator for investment momentum, jumped by 27.8% year over year. Much of this investment was driven by large jumps in the hotel and retail sectors, while all other sectors remained at levels similar to those seen in H1 2016. Private buyers were the most active in the OC market, accounting for 76% of the total, and looking for value-add opportunities.
After gradual cap rate compression since 2010, local cap rates have largely stabilized in H1 2017, with prices holding relatively firm. Multifamily was the only sector in Orange County that recorded tightening cap rates, while the industrial sector remained unchanged and retail and hotel cap rates pushed upwards. The general outlook for cap rates and returns on cost in the second half of 2017 is for continued stable pricing. The consensus is that if rates do change in H2 2017, they are more likely to increase modestly.
Growth in net absorption of Americas industrial & logistics space continued for the 28th consecutive quarter in Q1, but slowed substantially after near-record user demand last year.
Although net absorption in the U.S. decreased both quarter-over-quarter and year-over-year, the vacancy rate fell by 10 basis points (bps) to 4.8% and the availability rate was up slightly at 8.0%.
For the first time since Q3 2010, leasing demand fell short of new construction, though the gap between the two was narrow and had a negligible effect on overall availability.
As a result of the tight supply, the net rent index increased by 1.6% in Q1 and 6.7% year-over-year to $6.24 per sq. ft. —the highest level since CBRE Econometric Advisors (CBRE EA) began tracking this metric in 1980.
Driven by growth in the national economy, the Canadian industrial market has strengthened with sharp gains in user demand and record-low vacancy rates in Toronto and Vancouver.
Economic uncertainty in Mexico caused a slowdown in the industrial market, with user activity tapering slightly in the quarter and rents declining.
Despite some global and domestic economic uncertainty, the industrial real estate market continues to expand in most parts of the Americas.
The CBRE Americas Investor Intentions Survey 2017 captures the investment sentiment of nearly 1,000 investors focused on the Americas in 2017. While investors largely expect to maintain their 2016 activity levels, they also intend to retreat on the risk curve, becoming more conservative in strategy and risk appetite. This, however, is counterbalanced by their search for yield. Echoing concerns raised at the beginning of 2015, investors perceive global economic shocks and rising interest rates as the greatest threats to property markets. They also continue to have concerns about asset pricing.
Despite volatility in the financial markets, CBRE expects steady global economic growth in 2016, with U.S. consumers spending the gains from rising incomes, low interest rates and low commodity prices. The capital markets in the Americas are expected to remain extraordinarily active and favorable, particularly in the U.S. Download the full report for our outlook on the economy and all five property types.
This report is a one-page summary of our expecations for the entire Southeast U.S. economy looking forward from the end of 2016. It is one of a series of reports issued as a component of our Southeast Outlook Report (SEOR).
Net absorption of 58.3 million sq. ft. in Q2 2017 marked the 29th consecutive quarter of positive user demand—the longest such streak in more than 20 years. This level of user demand is somewhat of a return to the norm over this cycle, and is a significant improvement from the previous quarter’s growth rate.
New development was down 6.8% quarter-over-quarter with 43.5 million sq. ft. delivered. While this matches the average quarterly amount delivered since 2015, it was a surprising slowdown given the level of user demand and rapid growth of market rents. However, with 221 million sq. ft. in the pipeline, the slowdown should be short-lived.
Tight supply pushed net asking rents up in many core markets, with growth averaging 1.5% for the quarter and 6.6% year-over-year to $6.78 per sq. ft.—the highest mark since CBRE began tracking this metric in 1989.
The U.S. economy continued to see mainly positive growth in Q2. Economic activity in the manufacturing sector expanded in June, with new orders, production and manufacturing employment seeing the strongest growth. Inventories, on the other hand, saw some contraction, suggesting that the glut of manufacturing product from 2016 has been sold. Consumer spending remains the brightest spot for the economy, with monthly personal consumption expenditure (PCE) at around 4.2% as of May 2017. More importantly, continued strength in the job market and wage growth of around 2.5% as of June translate into more spending power and a higher disposable income for the U.S. consumer.
Following a strong previous quarter, Q2 2017 saw healthy market activity and year-to-date net absorption that exceeded year-to-date net absorption in mid-2016
Vacancy registered an decrease of 25.8% quarter-over-quarter and dropped 37.5% year-over-year.
The market-wide average asking lease rate increased by $0.07 per sq. ft. compared to Q1 2017.
Newly started construction for the quarter included two speculative projects and one build-to-suit (BTS) for a total of about 276,000 sq. ft. Existing construction, from the previous period, consisted of two speculative projects and one BTS expansion for a total of approximately 275,000 sq. ft.
Driven by some of North America’s most competitive market fundamentals, the national availability rate compressed by 20 basis points (bps) to close at 4.7%.
Heightened demand for space across most Canadian markets resulted in a Q2 positive net absorption of 4.2 million sq. ft. Toronto continued to account for a majority of this demand, while Calgary experienced a positive uptick this quarter and constituted the remaining majority.
Quarterly new supply reached a five-year low as only 1.8 million sq. ft. was completed. Strong fundamentals resulted in an increase of speculative construction projects. Overall construction grew 27.2% quarter-over-quarter to 11.6 million sq. ft. in Q2.
Tight conditions across major markets pushed the national average net asking rental rate to $6.78 per sq. ft., a growth of 4.4% year-over-year.
Strengthening economic fundamentals are now also evident as Canada’s industrial capacity utilization rate rose to a ten-year high of 83.3% in Q1 2017. This growth was accompanied by strong sector job gains.
Marijuana growers occupied 4.2 million sq. ft. in metro Denver’s industrial market in Q4 2016 – an expansion of 14% since our last round of local research into the industry in Q2 2015. Marijuana grow operations were concentrated solely in Class B and C industrial space, with nearly two-thirds (63.4%) in warehouse space.
Based on a sample size of 25 leases signed between 2014 and 2016, the average effective lease rate for marijuana grow houses was $14.19 per sq. ft. NNN—two to three times higher than the average warehouse lease rates in the four top cultivation submarkets.
In May 2016, Denver put a cap on the number of cultivation locations, so we can estimate that most of the 525,000 sq. ft. the market has taken up (on net) since our Q2 2015 research was conducted was absorbed prior to Q3 2016. Since then, the market has been stabilizing and consolidating.
Consolidation has been the theme for some time – to increase their market share and to take advantage of economies of scale, well-established operators have bought smaller mom-and-pop growers.
The updated Viewpoint report also looks into marijuana-occupied property sales, which have seen a 25% price premium over Class B and C warehouses in general. Finally, it discusses some real estate supply and demand dynamics that may influence the applicability of the Denver model in other markets.