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Jan.9, 2017

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LOOKING INLAND 120 THE JOURNAL OF COMMERCE JANUARY 9.2017 LOGISTICS 2017 ANNUAL REVIEW & OUTLOOK T he bull run the industrial real estate sector experienced in 2016 is expected to continue well into 2017 as importers and exporters seek quality sites for warehouses and distribution centers close to major seaports and inland hubs, but also in secondary markets. As long as demand for industrial space continues to exceed supply, retailers and other cargo interests should anticipate tight space, rising rents and fewer options in pri- mary locations near seaports and inland hubs. Because space is especially tight for the highest-quality "A" properties in those markets, some shippers may be forced to consider "B" properties in the primary markets. Alternatively, they will have to go farther out into adjacent markets to fi nd the quality sites and structures they need. That means shippers who can't find what want in the Los Angeles Basin, which has a vacancy rate of 0.9 percent; Chicago, with a 3.9 percent vacancy rate; or Cent- ral New Jersey, with a 3.4 percent vacancy rate, are likely to turn increasingly to nearby locations such as the Inland Empire, the areas west of Chicago, or the Lehigh Valley in eastern Pennsylvania, all of which have become more attractive. "These loca- tions are adjacent to the best locations," David Egan, head of industrial and logistics research for the Americas at CBRE, told The Journal of Commerce. The macro numbers for the third quar- ter of 2016 are impressive. Space availability nationally in the industrial sector increased for the 26th consecutive quarter, accord- ing to CBRE. The national vacancy rate for warehouse and distribution space dropped to 5 percent as demand outstripped supply. Rents nationwide increase 5.2 percent com- pared to the third quarter of 2015, to $6.47 per square foot. According to the third-quarter report by Jones Lang LaSalle, industrial tenants nationwide absorbed 67.9 million square feet of space, versus only 51.3 million square feet of new deliveries. The vacancy rate nation- wide, which had exceeded 10 percent in the depths of the 2008-2009 economic reces- sion, has been cut in half. Although this was the picture nationwide in late 2015, space at warehouses and DCs that serve West Coast ports was even tighter, said Aaron Ahlburn, JLL's managing director of industrial real estate. The vacancy rate in the Los Angeles Basin was 0.9 percent, compared with 4 percent in the Inland Empire 50 miles to the east, 2.4 percent in Oakland and the east Bay Area of Northern California, 1.8 percent in metro Seattle, and 2.2 percent in the Kent Valley-Pierce County industrial areas near Seattle-Tacoma. Because West Coast distribution hubs are driven primarily by seaports, JLL described the availability of warehouse and distribution space on the coast as "precari- ously low," and space availability is expected to remain tight in the coming year. As the seaport-served regions become closer to being built out, importers and exporters will have to move even farther inland for the space needed to build large big-box distribu- tion facilities. Despite these low vacancy numbers, the factors associated with industrial real estate — including new development, rents, and net absorptions — don't point to an overheated market or a real estate bubble. Ahlburn described the current industrial environ- ment as "disciplined." Egan said the defi ning factor in indus- trial real estate absorption this past year has been its diversity, both in location and the distribution activities in which retail- ers and other tenants are engaged. Only four of 53 markets CBRE tracks nationwide failed to experience positive net absorption. Primary markets at seaports, as well as in major inland hubs such as Chicago, Dallas- Fort Worth, and Atlanta all performed well, but so did locations adjacent to the core BY BILL MONGELLUZZO Tight vacancy rates and soaring prices at prime locations are forcing shippers to shi their focus to secondary industrial real estate markets

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