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36 THE JOURNAL OF COMMERCE www.joc.com APRIL 4.2016 JOC GUIDE TO WAREHOUSING/INDUSTRIAL REAL ESTATE SPECIAL REPORT acceleration of e-commerce sales. As a result, industrial real estate space is tight, especially in Tier One markets such as Southern California's Inland Empire, Chicago, Dallas, Atlanta, and New Jersey and eastern Pennsylvania. Net absorption, the industry's yard- stick for measuring growth, has averaged more than 200,000 million square feet a year since 2013, far outstripping the growth in supply. "Physical construc- tion has only cranked back up in the last 24 months," said Blaine Kelley, senior vice president of the global supply chain practice for CBRE, the world's largest commercial real estate brokerage. The net absorption rate has increased for 24 consecutive quarters, pushing occupancy levels to the highest point in 15 years. Kelley expects the U.S. net absorption rate in 2016 to fall in the 220 million- to 240 million-square-foot range, "barring any disruptive geopoliti- cal events." He expects new construction of 160 million to 180 million square feet, still far behind demand. "A heavy percentage of that is speculative in anticipation of continued e-commerce growth and consumer products industry demand," he said. Some two-thirds of industrial real estate is built on speculation, meaning builders undertake the project without a lease. Builders, however, didn't antici- pate that growth in consumer demand would be as healthy as it's been, nor did they anticipate the rapid growth of e-commerce and the demand for faster delivery in major urban centers. "So the overall demand for industrial real estate exceeds spec construction by about 2-to-1," Kelley said. Because of rising material, labor and land costs, buildings today are more expensive to construct, so rental rates are going up, said Chris Caton, senior vice president and global head of research at Prologis, the San Francisco- based industrial real estate investment trust. "What that means is that retailers really have to plan ahead earlier than they have in the past." Builders are scrambling to meet demand. "Supply is coming back a little more slowly than demand," Caton said. "New supply has been running at half or less of new demand for the last five years, but we think this year it will come much closer to parity." Not everyone thinks supply will catch up with demand anytime soon. "We expect vacancy rates to stay in the 6 percent range through 2020," said Richard Thompson, director of global supply chain and logistics solutions for Jones Lang LaSalle, the world's second- largest commercial real estate brokerage. "It may not be as low as this year, but it will still be very tight because spec con- struction is not keeping up." The U.S. isn't the only market where industrial real estate is tight. Demand for space is as strong in the U.K. as it is in Southern California," which Caton calls "the two hottest markets in the world." Japan and China have a dearth of indus- trial real estate. Both have low vacancy rates, so a lot of facilities are being built in both countries. Although Chinese export growth is slowing, the domestic consumer market is growing rapidly, and industrial real estate is in great demand. Online sales still account for only a little more than 7 percent of total U.S. retail sales, but they are forecast to grow "SUPPLY IS COMING BACK A LITTLE MORE SLOWLY THAN DEMAND."

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