As industrial real estate strengthens, tenants get squeezed.

Industrial real estate sees dipping vacancy rates and rising rent.

A low-supply of new industrial developments are pushing vacancy rates down and rental rates up, creating a commercial real estate environment favorable for landlords for the first time since the recession began.

"The market is shifting to favor landlords," Louis Tomaselli, senior managing director of Jones Lang LaSalle, told National Real Estate Investor. "Tenants are starting to scramble for opportunities, and the ones who are slow in making decisions are being forced into space they didn't want. Space is so tight that when we show tenants an inventory summary, they look at it and ask, 'Where's the rest?'"

Net absorption of industrial real estate in the 54 largest U.S. markets totaled 25 million square feet in the first quarter, according to Rene Circ, director of research for PPR. That figure is about three times larger than the first quarter of 2012's total.

As demand surges, new supply continues to remain low, Circ noted to the NREI. About 13 million square feet of new industrial facilities were delivered in the U.S. during the first quarter, and roughly 38 million square feet of facilities were under construction at the end of March. Both figures fall below historical averages.

"Construction basically stopped for two to three years," says Kim Snyder, president of the southwest region for Prologis. "It's ramped up over the past several months, but replacing stock takes a long time, especially with the regulations that govern development here [in California]."

With success comes rate hikes
With the industrial sector experiencing a vacancy rate of 8.2 percent, a full 20 basis points lower than the preceding quarter, the average rent for an industrial tenant climbed 2.5 percent year-over-year.

Understandably, investors have taken an interest in new industrial developments as many tenants are absorbing rent hikes. Confidence is high that some speculative construction has already taken place.

Many industrial tenants have seen their businesses expand and have maximized their space as much as possible, adding racking and seeking more intelligent layouts. But the supply is so low that many don't have any choice but to wait for new space to open up that will accommodate their growing business.

Jim Brice, a partner with Holt Lunsford Commercial, told NREI that while the industrial sector doesn't get the big spikes in value or rent like other opportunities, its appeal among investors is its consistency. It's a steady, solid play – yielding consistently positive results – a sector everyone wants in on, Brice noted.

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