IndustrialResearch

M A R K E T R E P O R T
Second Half 2013

Slow but Steady Economic Gains Support Broad-Based Industrial Revitalization

Though economic growth has been modest so far this year, demand for industrial space has been supported by an expansion of the drivers that underpin the economy distinguishing this years performance from the recent past. Demand for big-box distribution locations has expanded beyond traditional tenants, such as third-party logistics services, freight forwarders and other trade-related activities, to include a growing cadre of manufacturers, e-commerce companies, fulfillment centers, and home goods and food suppliers. In addition, the combination of easing credit conditions and low interest rates have spurred demand from small- to mid-sized manufacturing and high-tech firms, stabilizing industrial multi-tenant performance. Multi-modal mega-distribution hubs, submarkets near key seaports, air cargo and railroad transit locations, and modern Class A warehouse facilities remain the locus of industrial demand. As a result, the recovery in many metros and product types, while improving, continues to lag gateway and inland port markets. Similarly, investors have focused acquisitions on core assets in primary markets; however, recent transaction trends reflect a notable uptick in tertiary markets where higher yields and stronger revenue growth opportunities have attracted investors. The outlook for interest rates remains at the forefront of investors minds. Interest rates have driven a considerable portion of asset value increases, but values are rising against a backdrop of economic expansion and accelerating income growth. Monetary policy should remain calibrated to inflation and employment trends, with interest rates becoming increasingly volatile as the Fed reduces its pace of asset purchases. International trade, business investment, technology, energy and manufacturing remain pillars of industrial demand, and an upsurge in the residential sector and personal consumption has countered the decelerating pace of business investment. In addition, demographic trends remain highly supportive of near- and longer-term term industrial space demand, supported by population growth that will add 14 million people through 2017, boosting consumption, the residential sector, trade, and inventory restocking.

2013 Annual Industrial Forecast

1.9% increase in total employment

Economy: The economy is forecast to add 2.5 million jobs by year end 2013, lifted by 1.8 percent GDP growth. The trade, transportation and utilities sector, which added the third-largest concentration of new jobs this year, will boost demand for industrial real estate.

90 million square feet will be completed

Construction: Approximately 90 million square feet of new supply is is anticipated by year end. Much of the construction is substantially pre-leased, with build-to-suit opportunities in markets with functional obsolescence or inadequate supply still existing.

80 basis point decrease in vacancy

Vacancy: The national vacancy rate will plummet another 80 basis points to a six-year low of 8.4 percent by year end as forecast industrial demand absorbs 170 million square feet, surpassing the competitive space delivered to the market.

2.0% increase in asking rents

Rents: Asking rents nationally will increase by an average of 2.0 percent, while concession reductions boost effective rents. Rent and revenue gains in supply constrained, gateway markets will exceed national averages.

Markets with thethe Highest Markets with Lowest Expected 2013 Employment Growth Expected 2013 Employment Growth
San Bernardino Salt Lake City Harrisburg Houston Philadelphia Denver Chicago Phoenix Washington, D.C. Seattle-Tacoma Dallas/Fort Detroit Worth Miami Tampa Northern New Jersey Sacramento Cleveland Minneapolis Indianapolis Portland UnitedStates States United 0% 1% 2% 2% 4% 6% 3% 8% 4%
Nonfarm Employment (Y-O-Y(Y-O-Y Change) Nonfarm Employment Change)

Ri

ve rs id

Nonfarm Employment (Y-O-Y Change)

eS

National Industrial 0% Index 2%

4%

6%

8%

Markets with the the Lowest Markets with Lowest Expected 2013 Employment Growth 2013 Vacancy Rates 10% Expected
San Bernardino 8% Harrisburg Philadelphia 6% Chicago 4% D.C. Washington, Detroit 2% Miami Northern New Jersey Cleveland Indianapolis United States
Vacancy Rate
an ge Or

Ho us to n Co u Lo nt y s Se Ang at e les tle -T ac Sa om lt a La Ri k eC ve rs ity id eSa M i n Be ami rn ar di no De n ve M in r P ne ap ortl an ol d isSt Un . Pa ul ite d St at es

Square Feet (millions)

no

go

th

ele

nt

ni

W or

di

ica

tro

an

to

us

ng

At

Ch

Ph

De

ar

kl

rn

Ho

sA

Oa

rt

Be

Fo

14% Vacancy Rate 12% 10% 8% 6%

10% Vacancy Rate 8% 6% 4% 2%

Markets with the Lowest Expected 2013 Vacancy Rates

Ho Or us Sa an t ge on cram Co en u to Lo n s A ty At la Se ng n at ta tle eles De -T ac t ro Sa om i lt a Ph t La oe Ri k eC ve n ix rs ity Har id ris ebu Sa M rg i n m Be aW Bo rn ai ar sh st on di in no gt on De ,D P nv hi .C M . la e in de Po r ne l p rtl ap h a ia ol is- nd Ta St m . P Un p ite aul San a d St Un Dieg at it o es ed St at es

14% Vacancy Rate 12% 10% 8% 6%

Markets with the Highest Expected 2013 Vacancy Rates

page 2

it oe Ha nix rri sb ur g W Bo as s hi ng ton to n Ph , D. C. ila de lp hi a Ta m Sa pa n Un Dieg ite o d St at es

to

At la nt

en

De t

Sa

cr a

Ph

ro

Ri

Expected 2013 Vacancy Rates

Proximity to ports and spillover demand from more expensive metros advanced Oakland (#15) four rungs. Slow payroll growth dragged the Inland Empire (#11) down seven places, however, the area continues to benefit from spillover demand from both Los Angeles and Orange County industrial markets, which remain tight with little land available to accommodate new or expanding big-box requirements. Below-average job growth and a stubbornly high unemployment rate caused Chicago (#12) to remain stagnant and Philadelphia (#19) to slip six places. Chicagos strong forecast demand of 12.2 million square feet vastly exceeded new supply, resulting in a 100-basis point decline in the vacancy rate to 9.0 percent by year end. Harrisburg (#20) fell three spaces, dislodged by minimal job gains. Northern New Jersey (#13) climbed three spaces as the Hurricane Sandy effect and obsolescence have pushed rent growth for the limited amount of Class A space available. Despite impressive manufacturing and trade drivers, Portland
Marcus & Millichap

ve

Secondary and Support Markets Beginning to Build Momentum, but Losing Ground to Coastal Markets

rs

id

e-

Da

0%

Markets with(Y-O-Y the Change) Highest Nonfarm Employment

1%

2%

3%

4%

Sa

lla

s/

Lo

Special Industrial Research Report

Cl

ev

ela

oe

la

nd

it

Ri ve Ri rsid Square Feet (millions) ve e rs -S id an Square Feet (millions) eSa Ber n na Be di rn no ar Ho d Da usino lla s Da /F Ch ton lla ort ica s/ W go Fo or rt th PhWor oe th n A t ix Atlan la ta In P nta di ho an e ap nix M H o o lis in u n s Lo eapton s Lo A olis No s Ang rth ngele er e s n Ne D les w et Je roi r t Sa lt Oa sey La kl ke an Cl Citd ev y ela nd

14.0 14.0 10.5 10.5

7.0 7.0 3.5 3.5

0.0 0.0

xceptional demand exists for modern Class A bulk warehouse facilities in 14.0 markets with proximity to major ports, linkages to intermodal transportation 10.5 hubs, and access to air cargo nodes. The trend in developing inland ports for intermodal transportation and regional goods distribution has emerged 7.0 theme across many of the highly ranked or emergent industrial maras a common kets in the National Industrial Index. In addition, the energy, technology, trade 3.5 and, increasingly, healthcare and manufacturing sectors continue to lift regional 0.0 Brisk leasing and build-to-suit activity ties directly or indirectly to economies. port-related activities in many of the top-ranked markets, including Los Angeles (#1), Houston (#2), Seattle-Tacoma (#3) and Miami (#4). The confluence of demand from e-commerce retailers, conventional retailers that are increasingly engaged in e-commerce, and third-party logistics providers have quickly soaked up the majority of available Class A space, creating strong rent growth in the top markets. Miamis position as a premier intermodal transportation hub and its strong links to growing Latin American and Caribbean economies, which account for more than half of its cargo business, has spurred a wave of new demand for Class A space. Houston (#2) and Dallas (#8) along with Denver (#6) additionally benefit from strong ties to the energy sector and low levels of speculative new supply. Orange County (#5) held steady, stabilized by a diverse range of expanding small- to mid-sized companies. Asking rent growth should approach 2.0 percent, rising to $5.12 by year end, although much stronger rent increases are anticipated in new product and existing Class A product.

Port with Cities and Intermodal Hubs Lead Index Markets the Highest Expected 2013 Net Absorption

no Ho Da us lla to s/ n Fo rt W or th Ph oe ni x At la nt In a di an ap ol M is in ne ap ol Lo is No sA rth ng er ele n Ne s w Je rs Sa ey lt La ke Ci ty

an

Sacramento Minneapolis Portland United States

0.0
Be rn ad i

Marcus & Millichap Research Services

Markets with the Highest Markets with the Highest Expected 2013 Completions Expected 2013 Net Absorption

Marcus & Millichap Research Services

National Industrial Index

wth
Square Feet (millions) 14.0 10.5 7.0 3.5 0.0

Markets with the Highest Expected 2013 Completions

MSA Change Los Angeles Houston Seattle-Tacoma

Rank Rank 12-13 2013 2012

s 1

2 1 t 1 3 3 n 0 4 5 s 1 5 6
s 1

no Ho Da us lla to s/ n Fo rt W or th Ph oe ni x At la nt In a di an ap ol M is in ne ap ol Lo is No sA rth n er ge n les Ne w Je rs Sa ey lt La ke Ci ty

Be rn

ad i

Miami Orange County Denver Salt Lake City Dallas/Fort Worth Minneapolis Portland San Bernardino Chicago Northern New Jersey Indianapolis Oakland Fort Lauderdale San Diego Tampa Philadelphia Harrisburg Phoenix Atlanta Boston Washington, D.C. Cleveland Detroit Sacramento

ve rs id

eS

8%
Ri

an

6 8 s 2 7 8 7 14
n s

owth

Square Feet (millions)

(#10) fell one spot due toMarkets its still moderately high Highest vacancy rate. Salt Lake City (#7) with the remained solid at last Expected years spot in 2013 the ranking. Tampas (#18) rank moved up six Net Absorption places after posting the third-highest rate of job growth. Spillover demand from 14.0 Port Miami and an active market of small and mid-sized firms caused a 80-basis point decline10.5 in vacancy over the year in Fort Lauderdale (#16), launching the market up nine spaces.
7.0

0 6

9 11 t 2 10 9 t 1 11 4
t

Late-Recovery 3.5 Markets Dominate Lower Rungs of Ranking

0.0 in the lower third of the Index tend to be improving, late reMarkets placing covery markets, many of which suffered the most severe housing market downturn, including Phoenix (#21), Atlanta (#22), and Sacramento (#27). Thriving e-commerce and retailer demand for fulfillment centers and build to suit activity advanced Atlanta one space. Atlantas first quarter industrial sales fell 49 percent to $111.5 million compared with the prior year, however, the median price of $42 per square foot increased by 14 percent. Declines in federal government employment and procurement activities precipitated a nine-position fall for Washington, D.C. (#24). Weak job gains also moved Cleveland (#25) down three places and left Detroit (#26) near the bottom, although leasing near auto manufacturers shows promising momentum going forward.
s n d a x ele nt ni W or di ica tro an to us ela oe la nd no go th it ng At Ch Ph De ar kl rn Ho sA Oa rt Be Fo n Sa lla s/ Lo Cl ev Ri ve rs id eDa

12 12 n 0 13 16
s 3

4%

14 10 t 4 15 19 s 4 16 17 25 21
s s

es

9 4

Index Methodology The NII ranks 27 industrial markets based on a series of 12-month, forwardlooking economic and supply and demand variables. Markets are ranked based on their cumulative weighted-average scores for various indicators, including forecast employment growth, vacancy, construction, and rents. Weighing both the forecasts and incremental change over the next year, the index is designed to indicate relative supply and demand conditions at the market level. Users of the index are cautioned to keep several important points in mind. First, the NII is not designed to predict the performance of individual investments. A carefully chosen property in a bottom-ranked market could easily outperform a poor choice in a top-ranked market. Second, the NII is a snapshot of a one-year time horizon. A market facing difficulties in the near term may provide excellent long-term prospects, and vice versa. Third, a markets ranking may fall from one year to the next even if its fundamentals are improving. The NII is an ordinal index, and differences in ranking should be carefully interpreted. A top-ranked market is not necessarily twice as good as the second-ranked market, nor is it 10 times better than the 10th-ranked market.
l St at e s d

18 24 s 6 19 13 t 6 20 17 t 3 21 20 t 1 22 23 s 1 23 18 s 5 24 15
t

St

tes

Un

ite

.P au

at e

eg

25 22 t 3 26 26 n 0 27 27 n 0
page 3

Di

Un i

te

St

Marcus & Millichap

Special Industrial Research Report

National Economy

Marcus & Millichap Research Services

U.S. GDP
Annualized Quarterly Change in GDP 10%

5%

Economy Gathering Momentum Despite Headwinds, Fed Policy Remains a Wildcard

0%

-5%

-10%

he ongoing process of de-leveraging and recalibrating fiscal policy has challenged economic growth this year. Still, fundamentals have brightened measurably, distinguishing the current slowdown from that of the last two years. The effects of sequestration and higher taxes weighed on economic growth through the second quarter, but the solid rebound in housing, resilient consumer spending, broad-based private sector employment growth, and continued expansion in the energy and technology sectors will add to momentum throughout the remainder of the year. Gains posted in home prices and equity markets have helped restore nearly $16 trillion of the wealth surrendered in the Great Recession, lifting consumer and business confidence.
00 01 02 03 04 05 06 07 08 09 10 11 12 13*

Employment Trends
Total Employment

Change in Total Jobs (millions)

3 0 -3 -6 90 95 00 05 10 13*

3% 0% -3% -6%

Year-over-Year Change

Trade, Transport & Utilities Employment

6%

Industry sectors that detracted from growth in recent years have reversed course and now exert a neutral to highly positive influence on GDP. A slower pace of consumer spending Employment Trends Total to Emp. Trade, Transport, & Utilities Emp. resulted in a downward revision to first quarter GDP growth an annualized 1.1 percent, 6% Inventory investment, household while the second quarter offered 1.7 percent growth. consumption and residential investment fueled growth, while declining government 3% spending subtracted. Business continues to fare better than households, as corporate profits grew at a healthy 7.0 percent pace in 2012 compared with diminished personal income growth and lower savings rates. Nonetheless,0% retail sales have surpassed their prerecession high by 12.2 percent. New and existing home sales evince solid traction in sales -3% volume and pricing, while residential permitting has approached the highest levels in at least five years. Monetary easing continues to support the credit markets and sub-trend -6% job growth and inflation remain comfortably below levels that 95 raise a red flag for the 90 00 05 10 Federal Reserve. 2013 Economic Outlook Broad-Based Recovery Continuing to Form. The U.S. economy has recovered 6.7 million of the jobs lost during the recession with broad-based gains benefitting a wide range of industries nationwide. The technology, energy and trade sectors will remain powerful supports to the economy, but will be bolstered by the double-digit gains posted by residential investment and business investment spending on structures and business equipment and software. The manufacturing sector exhibited weakness in production levels earlier this year, but the most recent reports suggest broad-based positive performance, particularly in the forward-looking durable goods orders. Economic and employment growth will align with last years pace before accelerating in 2014. GDP is forecast to average 1.8 percent growth this year, while payrolls are forecast to expand by another 2.5 million jobs, holding the unemployment rate to the 7.4 percent range. The trade, transport and utilities sector, which added the third-largest concentration of new jobs, will boost demand for industrial real estate. Credit growth will support economic performance. Business credit will expand in the form of commercial and industrial loans, aiding recovery momentum for smaller-sized employment establishments. In addition, healthier consumer balance sheets will enhance credit access, benefitting from low inflation and interest rates, which will support cautiously higher levels of debt and spending. The Fed maintains quantitative easing, but will slow asset purchases. Low inflationary pressure and the Feds confidence in the U.S. economys resilience to fiscal belt tightening signaled a transition to a more normal monetary policy. However, the Fed will remain highly calibrated to support economic growth, as they will not risk stalling the nascent recovery. Treasury rates will remain highly volatile in the coming months.
Marcus & Millichap

Corporate Profts vs. Exports as a % of GDP

Corporate Prots Exports as a % of GDP

TTU Year-over-over-Year Change

12

Annualized Prots (billions)

$2000 $1500 $1000 $500 $0 01 02 03 04 05 06 07 08 09 10 11 12 13**

14% Exports as a % of GDP 12% 10% 8% 6%

Unemployment Rate vs. Capacity Utilization

11% Unemployment Rate 9% 7% 5% 3% 70 75 80 85 90 95 00 05 1013***
Unemployment Rate Capacity Utilization

90% Capacity Utilization 84% 78% 72% 66%

*Forecast **Through 1Q ***Through June

page 4

Special Industrial Research Report

Marcus & Millichap Research Services

Statistical Summary

Vacancy (Year-End)1

Asking Rent per Sq. Ft.1

Completions (000s of Sq. Ft.)

Employment Growth1

MSA Name
Atlanta Boston

12

13*

12
3.14 6.30 4.05 3.27 4.16 4.90 4.13 6.24 3.59 5.49 2.87 6.34 7.92 5.43 5.91 6.82 7.49 4.76 5.88 5.18 4.18 4.54 4.63 9.81 6.38 4.36 7.20 5.02

13*
3.21 6.38 4.24 3.34 4.45 5.06 4.19 6.43 3.73 5.79 2.90 6.53 8.17 5.61 6.07 7.08 7.71 4.84 6.10 5.36 4.36 4.58 4.85 10.02 6.60 4.47 7.32 5.12

12
1,656 468 3,171 1,234 1,823

13*
4,500 800 2,700 615 6,500

12
2.4% 1.6% 1.4% 1.5% 3.6% 2.6% 0.9% 2.1% 1.5% 3.8% 2.0% 2.2% 1.4% 1.9% 1.6% 2.7% 2.7% 1.1% 2.8% 0.9% 3.0% 1.3% 4.0% 2.4% 2.5% 2.2% 1.2% 1.7%

13*
2.6% 2.3% 1.4% 1.9% 3.2% 4.1% 1.5% 2.0% 0.7% 4.3% 2.0% 2.3% 1.6% 2.8% 1.6% 2.1% 2.3% 1.2% 3.5% 2.7% 0.7% 2.5% 4.6% 1.8% 3.3% 2.9% 1.5% 1.9%

13.3% 12.4% 10.8% 10.4% 10.0% 9.0% 9.5% 8.8% 8.7% 8.1% 6.7% 6.4% 12.6% 11.7% 9.5% 8.8% 13.0% 11.0% 4.9% 4.8% 6.5% 6.9% 5.5% 5.0% 6.9% 6.0% 6.6% 6.8% 8.8% 8.6% 10.3% 8.9% 6.0% 4.9% 10.4% 10.1% 12.3% 11.5% 7.2% 6.7% 6.8% 6.4% 14.1% 13.7% 5.5% 5.1% 10.1% 9.4% 5.9% 5.1% 10.6% 9.7% 10.8% 10.2% 9.2% 8.4%

Chicago
Cleveland Dallas/Fort Worth Denver

585 1,200 445 1,285 0 300 3,042 4,370 1,274 2,373 445 100 7,000 4,200 3,000 450

Detroit
Fort Lauderdale

Harrisburg
Houston Indianapolis Los Angeles Miami Minneapolis-St. Paul Northern New Jersey Oakland Orange County Philadelphia Phoenix Portland Riverside-San Bernardino Sacramento Salt Lake City San Diego Seattle-Tacoma Tampa Washington, D.C. U.S. Metro Average

272 3,900 678 1,700 320 26 592 2,610 731 6,739 242 1,956 179 145 47 800 250 400 6,200 500 12,500 700 1,500 200 800 300

655 1,000 47,460

* Forecast
1

90,000

See National Industrial Index Note on page 16.

Marcus & Millichap

Special Industrial Research Report

page 5

National Industrial Overview

Marcus & Millichap Research Services

Industrial Construction Trends

Square Feet Completed (millions) 240 180 120 60 0

Industrial Demand Expands Beyond Big Box Warehouses and Key Port Locations

00 01 02 03 04 05 06 07 08 09 10 11 12 13*

ecent industrial tenant leasing activity clearly reflects broadening demand for smaller Class B properties and a greater variety of metros. About half of the top 50 U.S. industrial markets exhibited positive demand in 2010, and now more than three-quarters post positive momentum. Demand still skews to Class A functional warehouse properties near large ports and major distribution hubs in coastal metro areas, but several trends have lifted demand for non-warehouse uses in Class B, multi-tenant properties. These assets continue to capture a greater share of net absorption, reflecting spillover demand from the already tight Class A segment in addition to stronger expansion by smaller- to medium-sized businesses, which favor the discounts inherent in Class B rents. Net absorption of industrial space registered 128 million square feet in 2012, 11.8 percent higher than absorbed in 2011, and nearly three times greater than the 47.5 million square feet of new supply delivered. Supply additions have ramped up appreciably but not alarmingly, with first half 2013 completions totaling 30.1 million square feet, almost double the volume recorded one year ago. The slowdown in manufacturing and production metrics early in the year may have slowed economic growth, but did not significantly deter new demand. Tenants absorbed 59.0 million square feet in the first half, posting a 4.3 percent increase in demand over the first half last year. Outsized demand relative to new supply has driven down the national industrial vacancy rate by 70 basis points to 8.9 percent, 210 basis points below the 2010 peak. Asking rents gained traction last year, rising 2.6 percent to $5.10 per square foot, but they remain 12.6 percent below the 2008 peak.
2013 National Industrial Forecast

Industrial Absorption and Vacancy

Net Absorption Vacancy Rate

Square Feet Absorbed (millions)

240 120 0 -120 -240 01 02 03 04 05 06 07 08 09 10 11 12 13*

14% 12% 10% 8% 6%

Vacancy Rate

Industrial Rent Trends

Asking Rent per Square Foot $6 $5 $4 $3 $2

Expanding trade flows and consumption have increased the scope of tenant demand. Broader economic improvement will help stabilize demand by smaller- to medium-sized firms. They will favor high quality properties in secondary markets, as well as Class B properties in primary markets. E-commerce big-box users, which include Amazon and a burgeoning coterie of other purely e-commerce retailers, and multi-platform users, such as Wal-Mart, Best Buy and Apple, will sustain demand for modern, highly efficient distribution space in logistics markets. Speculative and build-to-suit developments ramp up to levels comparable to historical trend. High-demand markets with strong ties to energy, technology and logistics operations, such as Houston, Austin, Dallas, the Inland Empire, Atlanta and, more recently, Phoenix, will continue to generate impressive tenant demand and post a surge in speculative and build-to-suit development geared toward big box distribution. Industrial rents will post gains as surging demand dwarfs new supply. Completions, estimated at 90 million square feet for 2013, roughly doubled supply additions of 2012. This remains well-below the anticipated demand of 170 million square feet, and will tighten vacancies another 80 basis points to 8.4 percent, the lowest in nearly six years. Overall asking rents nationally are forecast to increase 2.0 percent, with limitedsupply gateway markets rising 4.0 percent or more. Rents for other space segments will find rent traction as occupancies firm.

00 01 02 03 04 05 06 07 08 09 10 11 12 13*

Vacancy by Property Type

Flex Warehouse All Industrial

15% Average Vacancy Rate 13% 11% 9% 7%

05

06

07

08

09

10

11

12

13**

*Forecast **Through 2Q

Graphs include data from CoStar Group, Inc.

page 6

Marcus & Millichap

Special Industrial Research Report

Marcus & Millichap Research Services

Investment Outlook

Broad-Based Economic Improvements Broaden Buyer Interest Beyond Primary Markets

Average Price per Square Foot

Industrial Property Price Trends

Price per Sq. Ft. Cap Rate

10% $70 espite slower than expected progress, sustained U.S. economic resilience concurrent with rising industrial fundamentals and muted supply levels have success9% $60 fully moved investors and lenders beyond the safety of primary markets. Total sales of industrial properties have returned to 2005-2006 volumes. Price recovery has 8% $50 varied widely by market and product type, with coastal metros tied to port activity and metros with robust employment gains outperforming the majority of industrial markets. 7% $40 Notable price appreciation and cap rate compression in the California markets has motivated investors to seek lower-cost markets with greater opportunities for revenue growth. 6% $30 01 02 03 04 05 06 07 08 09 10 11 12 13* Similarly, economic growth in the Southwest, even beyond the four key Texas metros, has propelled a 280 percent increase in transactions in tertiary Southwest markets in the first quarter this year. Nationally, major metros comprised 42 percent of sales volume compared with 19 percent in tertiary markets, but the 47 percent activity increase in tertiary Industrial Cap Rate Trends by Market Type Primary Secondary Tertiary markets marked the third consecutive quarter of besting only modest increases in primary 10% and secondary markets. Average Cap Rate

Big-box retailers and logistics operators remain the key drivers of overall leasing demand; accordingly, warehouse and distribution facilities dominate investor sales, accounting for two-thirds of first quarter volume. First half sales of all industrial properties totaled $24.1 billion, an annualized increase of 4 percent. Warehouse property sales increased 17 percent; conversely, sales of flex properties declined 18 percent over the year. Prices behaved differently, however. The average price for all warehouse properties fell 9.0 percent to $48 per square foot, likely the result of higher volume as well as distress sales in tertiary markets. Investors paid an average price of $31 per square foot paid for assets in tertiary markets, representing a 64 percent discount to $86.00 recorded in primary markets. Flex space climbed 9 percent to $103 per square foot, still 29.8 percent below the peak.
2013 Industrial Investment Outlook

Average Cap Rate

9% 8% 7% 6% 04 05 06 07 08 09 10 11 12 13*

Industrial Transactions by Price Category

$1M-$10M $10M-$20M $20M+

3200 Total Transactions 2400 1600 800 0

Global gateway and inland logistics hubs will dominate tenant demand. Recovery in global trade, functional obsolescence of industrial stock, and tight vacancies in modern Class A properties will result in a sizeable pipeline of speculative and buildto-suit construction. Metros with a confluence of strong population and employment centers, transportation hubs, a locus of high-tech, trade or energy drivers, and balanced fundamentals will more readily assimilate new supply. The housing recovery will boost demand for smaller warehouse spaces; investors selectively expand to other asset types. Stronger employment growth in small- to medium-sized businesses has resulted in appreciably broader leasing demand for Class A small-bay warehouse and manufacturing space, as well as Class B multi-tenant spaces, which will significantly shore up NOI performance in these segments over the year. High-tech manufacturing and services will support growth in modern R&D, flex and business park space in high-amenity locales. The narrowing cap rate spread between secondary and tertiary markets manifests investor willingness to take risk. Investors should be wary of commodity product in inferior submarkets, and seek above-average population and employment growth. Markets with a low ratio of construction relative to inventory and a still-significant discount in current rents relative to peak values are also sought-after. Metro data often masks trends at the submarket and asset tier level, so due diligence is imperative.

04

05

06

07

08

09

10

11

12

13*

Industrial Buyer Composition

100%
Foreign

Percent of Total

75% 50% 25% 0%

Private Public/REIT Institutional/ Equity Fund User/Other

08

09

10

11

12

13*

*Through 2Q Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Marcus & Millichap

Special Industrial Research Report

page 7

Atlanta

Up 1 Place

2013 Rank: 22

2012 Rank: 23

Employment Trends
6%
Year-over-Year Change Metro United States

3% 0% -3% -6%

H
13*

Atlanta Recovery Gains Traction; Construction Pipeline Builds

09

10

11

12

Industrial Supply and Demand

10
Square Feet (millions) Completions Absorption Vacancy

16% 14%
Vacancy Rate

igh demand for Class A bulk distribution properties from e-commerce retailers and third-party logistics operators fortifies Atlantas position as the regional logistics hub of the southeast. The Atlanta industrial market also benefits from steady growth at the Port of Savannah, which recently cleared legal hurdles to begin dredging the Savannah River in anticipation of the post-Panamax ships expected in the next three years. Robust demand and record-low levels of construction tamed the vacancy rate, which plummeted 100 basis points to 12.7 percent as of the second quarter. A thin supply of existing Class A facilities and a high degree of obsolescence in older distribution space has spurred increased construction and reflects considerable build-to-suit activity as well. Approximately 4.5 million square feet is slated for delivery in 2013, the most in five years but still about half levels typical of the market. Similarly, forecast net absorption of 9.1 million square feet for the year will mark a six-year high, yet remains well below the 20 million-plus square feet the market historically has proven capable of assimilating. Atlanta posted broad-based employment gains as of June. The trade, transportation, and utilities sector added an annualized 10,000 jobs, a recovery of 56 percent of the jobs shed in this sector. By comparison, 14 percent of manufacturing jobs have been recouped. The unemployment rate as of June dropped 100 basis points over the year to 7.9 percent, elevated by strong labor force growth. Investment activity remains somewhat muted, however. Nationally, tertiary and secondary markets posted solid momentum in the first quarter, often outperforming larger markets such as Atlanta. Atlantas industrial sales rose 6 percent compared to the prior year, and the median price of $36 per square foot increased accordingly by 3 percent. Cap rates range between 7.0 and 7.4 percent. A significant ramp up in private and user investment activity in Atlanta has shifted the investor profile from the once dominant institutions and REITs, at least at this point in the cycle. 2013 Market Outlook

5 0 -5 -10

12% 10% 8%

09

10

11

12

13*

Asking Rent Trends

3%
Year-over-Year Change

0% -3%

-6% -9%

2013 NII Rank: 22, up 1 place. Strong employment gains and robust leasing demand lifted Atlanta in the Index. Employment Forecast: Atlantas job base grew by 55,000 in 2012, with the annualized pace accelerating this year to 61,000, or 2.6 percent, slightly outpacing the U.S. rate. Atlanta has recouped nearly 477,000 jobs since the 2010 trough. Construction Forecast: Developers completed a scant 1.7 million square feet of inventory in 2012. However, an upswing in build-to-suit activity, as well as speculative development, will contribute 4.5 million square feet in 2013. Vacancy Forecast: Industrial demand is forecast to overshadow new supply, resulting in a 90-basis point decline in the vacancy rate to 12.4 percent by year end. Rent Forecast: Asking rents posted a 1.9 percent gain in the second quarter, following 15 consecutive quarterly declines. Asking rents are forecast to rise an average of 2.2 percent in 2013, and higher for Class A distribution spaces. Investment Forecast: Atlanta is poised for a strong recovery in operations, which will present affordable options for moderate NOI growth for value-add investors.
Construction: 2.8M s Vacancy: 90 bps t
Marcus & Millichap

09

10

11

12

13*

Sales Trends
$50
Median Price per Square Foot

$45

$40 $35 $30

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
page 8

Employment: 2.6% s

Asking Rents: 2.2% s

Special Industrial Research Report

No Change

2013 Rank: 12

2012 Rank: 12

Chicago

Chicago Industrial Vacancy Falls as Construction Trends Remain Favorable

Year-over-Year Change

hicagos economic recovery has lagged the more robust expansion of comparably sized metros, although the pace of hiring has picked up solidly this year. In addition, the metro clearly benefitted from pent-up demand from corporate tenants, food users and third-party logistics operators over the past year, driving significant improvements in space fundamentals. The Chicago metro absorbed just over 17 million square feet in 2012 compared with less than 3.4 million square feet in net additions to inventory. Consequently, Chicagos vacancy rate has plummeted 150 basis points to 9.9 percent as of the first quarter, the lowest in seven years. Enough excess space still exists to mute significant rents gains, but Class A distribution and manufacturing product, and good, functional space with proximity to strategic transportation routes reflect firming rents. Chicagos job growth increased 1.3 percent with the addition of 55,300 jobs annualized as of June. Industrial sectors, including transportation, trade and utilities, and manufacturing, comprise a significant portion of the metros employment base, which represents a large but slow growth locus of jobs. This structural feature has shaped a predominantly cautious investor profile with a strong preference for core properties and modern buildings occupied by strong credit tenants. The shortage of Class A distribution space available to meet tenant requirements together with investor demand has sparked an upswing in construction, although developers remain cautious and speculative development constrained. 2013 Market Outlook

Employment Trends
2% 0% -2% -4% -6%
Metro United States

09

10

11

12

13*

Industrial Supply and Demand

20
Square Feet (millions) Completions Absorption Vacancy

14% 12%
Vacancy Rate

10 0 -10 -20

10% 8% 6%

09

10

11

12

13*

Year-over-Year Change

2013 NII Rank: 12, no change. Markets with stronger recovery momentum passed Chicago in the ranking. The unemployment rate remains stubbornly elevated at 9.3 percent, 40 basis points higher than one year ago. Employment Forecast: The forecast 63,000 jobs will outpace last years gain of 60,600. Thus far in 2013, trade and transportation, manufacturing and construction hiring remains quiet, but the strengthening residential sector and solid auto sales and manufacturing activity should lift hiring later in the year. Construction Forecast: Land scarcity in key submarkets will result in measured additions to supply totaling approximately 2.7 million square feet by year end, much of which is already pre-leased. Vacancy Forecast: Strong forecast demand of 12.2 million square feet will exceed new supply by more than five times, resulting in a 100-basis point decline in the vacancy rate to 9.0 percent by year end. Rent Forecast: Annualized asking rents increased 2.0 percent to $4.10 per square foot as of the first quarter. Asking rents in Chicago are forecast to increase 4.7 percent to $4.24 by year end, stemming a four-year slide. Investment Forecast: Industrial transaction activity increased 12 percent over the past 12 months. The median price per square foot trended down 6.3 percent to $39, while the cap rate compressed 60 basis points to 7.5 percent. Although cap rates are now on par with the U.S., pricing remains 32 percent below the metros peak and 36 percent below the median price nationally.
Employment: 1.4% s
Special Industrial Research Report

Asking Rent Trends

10% 5% 0% -5% -10%

09

10

11

12

13*

Sales Trends
$52
Median Price per Square Foot

$47 $42 $37 $32

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
Marcus & Millichap

Construction: 100K t

Vacancy: 100 bps t

Asking Rents: 4.7% s

page 9

Dallas/Fort Worth

Up 6 Places

2013 Rank: 8

2012 Rank: 14

Employment Trends
4%
Year-over-Year Change Metro United States

2% 0% -2% -4%

S
13*

Development Ramping Up as Metroplex Industrial Performance Makes Significant Gains

09

10

11

12

teep demand increases from retailers and logistics service providers over the past year spurred tremendous momentum in the Dallas-Fort Worth industrial market. With Amazon, Quaker, Restoration Hardware and Del Monte fulfilling lease requirements ranging between nearly 700,000 and nearly 2.2 million square feet, the vacancy rate plunged 130 basis points to 8.2 percent in the second quarter. In addition, cumulative net demand of 28.1 million square feet has eclipsed new supply of less than 6.2 million square feet between 2010 and 2012, finally lending traction to asking rents, which jumped 13.1 percent annualized as of the second quarter. Consequently, a sharp increase in new supply of 6.5 million square feet is forecast to deliver in 2013, the highest level in three years, although much of it is build-to-suit. Dallas sustains an impressive pace of job growth, on-pace to add nearly 98,000 jobs this year. Transportation, trade and utilities contributed 17 percent, or 17,100 jobs, to this expansion, bringing the number of transportation and trade jobs recouped to nearly 60,000 since 2010. However, the notable 2.5 percent annualized growth in the labor force has kept the 6.3 percent unemployment rate somewhat elevated. The strength of Dallas industrial sector is not lost on investors. Transaction volume was among the highest metros in the country last year, with industrial sales increasing 19 percent over the past 12 months. The median price of $35 per square foot climbed 2.0 percent and the median cap rate compressed 20 basis points to 7.0 percent. Robust activity from private investors, REITs and owner occupants has diminished the share of institutional and international investors. 2013 Market Outlook

Industrial Supply and Demand

12
Square Feet (millions) Completions Absorption Vacancy

12% 8%
Vacancy Rate

8 4 0 -4

4% 0% -4%

09

10

11

12

13*

Asking Rent Trends

12%
Year-over-Year Change

2013 NII Rank: 8, up six places. Robust employment, leasing demand and the solid recovery in fundamentals and rents lifted Dallas-Fort Worth in the Index. Employment Forecast: Employment expanded by 106,300 in 2012, or 3.6 percent. The greater Dallas region has more than fully recovered the jobs shed in the past recession. Job growth is forecast to approach 98,000 jobs in 2013. Construction Forecast: Build-to-suit activity, as well as speculative development, will contribute 6.5 million square feet of new product in 2013 compared with the minimal 1.8 million square feet completed in 2012. Vacancy Forecast: Forecast net absorption of 9.6 million square feet for the year will mark a decline from the past two years exceptional activity, yet remain in line with historical averages. Thus, steady demand will again surpass new supply resulting in a 60-basis point decline in the vacancy rate to 8.1 percent by year end. Rent Forecast: Asking rents have posted gains for four consecutive quarters, rising $0.49 per square foot to $4.23 as of the first quarter. Asking rent growth in Dallas is expected to lead the markets in the Index, rising to $4.45 by year end, representing a 7.1 percent annualized increase. Investment Forecast: Investors should be cautious about the ramp up in speculative construction, which could result in pockets of brief over-supply in big-box distribution space and an increasingly competitive leasing environment.
Construction: 4.7M s Vacancy: 60 bps t
Marcus & Millichap

6%

0% -6%

-12%

09

10

11

12

13*

Sales Trends
$38
Median Price per Square Foot

$36

$34 $32 $30

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
page 10

Employment: 3.2% s

Asking Rents: 7.1% s

Special Industrial Research Report

Down 1 Place

2013 Rank: 2

2012 Rank: 1

Houston

Houston Employment Engine Powers Industrial Assets as Port Readies for Panamax Ships
Year-over-Year Change

road-based demand from energy, technology, manufacturing and distribution companies pushed net absorption to 7.1 million square feet in 2012, a trend that has continued into 2013 at a moderately slower pace. Houstons vacancy rate declined another 40 basis points to 4.8 percent as of the second quarter, constrained primarily by a lack of suitable Class A space. Houston continues to invest heavily in the Port of Houston, which will be Panamax-ship ready by the end of this year. In addition, Southwest Airlines has committed $150 million toward terminal expansion at Hobby Airport to facilitate international service. Port trade and air freight handling both posted increased services volume over the past year. Houston created nearly 56,100 jobs in the first half of the year, the largest gain of any market. This represents a slight deterioration in the pace of growth compared with last year, however, the recent spike in Houstons Business Cycle Index implies an accelerated pace of regional economic expansion on the horizon. Transportation, trade and utilities added nearly 23,000 jobs and the sector is now 6.9 percent above the prior peak. Similarly, the manufacturing sector added 7,000 jobs, now 2.9 percent above the prior peak. Despite the strong unemployment market, robust labor force growth caused unemployment to tick up to 6.3 percent. Houston appears to be one of the best positioned metros in the U.S. for continued expansion and investment. Industrial transaction activity increased 35 percent over the past 12 months. The median price of $63 per square foot surged 10 percent and the median cap rate compressed to 7.8 percent. Portfolio-driven activity and acquisitions dominated by private investors and public REITs currently capture Houstons investment activity. 2013 Market Outlook

Employment Trends
6% 3% 0% -3% -6%
Metro United States

09

10

11

12

13*

Industrial Supply and Demand

8
Square Feet (millions) Completions Absorption Vacancy

8% 6%
Vacancy Rate

6 4 2 0

4% 2% 0%

09

10

11

12

13*

Asking Rent Trends

10%
Year-over-Year Change

2013 NII Rank: 2, down 1 place. Houston ranks second in the Index for absolute job growth and the lowest vacancy rate. Measured construction activity and broad-based economic expansion cemented Houstons position. Employment Forecast: Houston employment expanded by 99,800 in 2012, or 3.8 percent. The strength of the regional economy has spurred significant expansion by local businesses. Job creation of 117,500 is forecast to continue to lead the nation and rival that of Dallas-Fort Worth in 2013. Construction Forecast: Nearly 40 percent of product under construction is reportedly pre-leased. Robust development will contribute 7.0 million square feet of new supply this year, representing a 62 percent increase compared with 2012. Spiking land prices near superior logistics routes will elevate construction costs. Vacancy Forecast: Anticipated demand of 7.1 million square feet will align with expected new supply, easing vacancies by 10-basis points to 4.8 percent this year. Rent Forecast: Asking rents posted gains for 10 consecutive quarters, rising 5.0 percent to $5.44 per square foot as of the second quarter. Asking rent growth is expected to climb to $5.79 by year end, representing 5.5 percent growth. Investment Forecast: Cap rates for Houston industrial assets maintain a favorable spread relative to interest rates. The dearth of available Class A assets will boost activity in Class B distribution facilities located near major transportation routes.
Employment: 4.3% s
Special Industrial Research Report

5% 0% -5% -10%

09

10

11

12

13*

Sales Trends
$70
Median Price per Square Foot

$60 $50 $40 $30

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
Marcus & Millichap

Construction: 2.6M s

Vacancy: 10 bps t

Asking Rents: 5.5% s

page 11

Los Angeles

Up 1 Place

2013 Rank: 1

2012 Rank: 2

Employment Trends
6%
Year-over-Year Change Metro United States

3% 0% -3% -6%

L
13*

Industrial Assets Making Gains as Los Angeles Area Port Activity Escalates

09

10

11

12

Industrial Supply and Demand

8
Square Feet (millions) Completions Absorption Vacancy

os Angeles industrial tenants absorbed 4.4 million square feet in 2012, nearly double the construction levels, reducing the vacancy rate 30 basis points to 5.5 percent. Leasing velocity waned and net absorption turned negative in the second quarter of this year, however, as vacancy edged up 40 basis points, a somewhat surprising result given the tightness of the market and increased container volume in the twin Ports of Los Angeles and Long Beach. The nations busiest ports posted a combined 2.5 percent growth rate year-to-date through May in container trade (TEUs), and exceeded 1.3 percent annualized growth in 2012. The movement of a major shipping line from Los Angeles to Long Beach and expanded footprints by existing Long Beach shippers altered port dynamics this year, creating a significant net decline in total TEUs in Los Angeles and double-digit growth for Long Beach. Both ports have capital improvements underway to compete with east coast ports for shipping contracts upon completion of the widening of the Panama Canal. The Los Angeles economy gained considerable momentum since the first quarter of last year, adding 40,900 jobs for an annualized gain of 1.1 percent as of June. However, the downward adjustment primarily to Information Services of nearly 6,100 jobs in June, pared year-over-year job gains to 1.1 percent. Los Angeles has recovered nearly 38 percent of total jobs lost during the recession, but only 30 percent of jobs in the trade, transportation and utilities sector, which implies significant growth ahead, particularly given the rise in imports at the twin Ports. These trends, concurrent with rising consumption and the housing recovery, will drive space demand from retailers, logistics providers, and auto suppliers. 2013 Market Outlook

8% 6%
Vacancy Rate

4 0 -4 -8

4% 2% 0%

09

10

11

12

13*

Asking Rent Trends

12%
Year-over-Year Change

6% 0% -6%

2013 NII Rank: 1, up one place. Rising trade volumes and port activity, low vacancy and rent gains moved Los Angeles to the top of the Index. Employment Forecast: Los Angeles employment expanded by 85,100 in 2012, or 2.2 percent, and is expected to post similar gains by the end of the year. Construction Forecast: Completions totaling nearly 3.0 million square feet will fetch rent premiums from tenants seeking functional, Class A space in the South Bay and Central submarkets proximate to the ports. Vacancy Forecast: Forecast net absorption of 6.5 million square feet will be the strongest in five years and more than double anticipated supply, resulting in a 10-basis point fall in the second quarter vacancy rate to 5.0 percent by year end. Rent Forecast: Asking rents have posted gains for five consecutive quarters, rising to $6.46 as of the second quarter. Asking rent growth should approach 3.0 percent, rising to $6.53 by year end, although much stronger rent increases are anticipated in new product and existing Class A product. Investment Forecast: Industrial transaction volume climbed 6.9 percent over the past year. The median sale price climbed 2.0 percent to $97 per square foot and the median cap rate compressed 30 basis points to 6.8 percent. Class B properties in infill submarkets proximate to the ports may offer a value add strategy for renovation and reposition.
Construction: 0.6M s Vacancy: 50 bps t
Marcus & Millichap

-12%

09

10

11

12

13*

Sales Trends
$110
Median Price per Square Foot

$100 $90 $80

$70

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
page 12

Employment: 2.3% s

Asking Rents: 3.0% s

Special Industrial Research Report

Up 1 Place

2013 Rank: 4

2012 Rank: 5

Miami

Major Port Renovations Bode Well for Miami-Dade Industrial Performance

Year-over-Year Change

he pace of Miami-Dade economic growth slowed markedly in the second quarter, posting annualized job gains of just 0.6 percent. Fortunately, trade and transportation is making steady gains, boosting this employment subsector by 2.1 percent. Expansions and relocations to higher-quality space by existing tenants characterize much of the leasing activity. However, Miamis position as a premier intermodal transportation hub and its strong links to growing Latin American and Caribbean economies, which account for more than half of its cargo business, has spurred a wave of new demand for Class A space from third-party logistics and freight forwarding companies. The overall vacancy rate declined 100 basis points in 2012 to 6.9 percent, with Class A space availability even tighter. The sharp increase in net absorption has spurred speculative construction, which will likely fall short of demand this year. Port Miamis $2 billion dollar infrastructure investment now underway includes a tunnel under Biscayne Bay to link the port to the interstate highway system, ondock rail service, and dredging the channel to 52 feet to accommodate post-Panamax era ships. This investment and the completion last year of a $3 billion renovation and expansion at Miami International Airport will propel growth and shape the industrial landscape in the future. In addition, the rapid improvement in performance suggests landlords will soon reap stronger bargaining power. Robust investor demand over the past 12 months created a 72 percent surge in sales volume. The median price per square foot spiked 6.2 percent to $69 and cap rates compressed 100 basis points to 6.5 percent. 2013 Market Outlook

Employment Trends
6% 3% 0% -3% -6%
Metro United States

09

10

11

12

13*

Industrial Supply and Demand

4
Square Feet (millions) Completions Absorption Vacancy

12% 10%
Vacancy Rate

2 0 -2 -4

8% 6% 4%

09

10

11

12

13*

Asking Rent Trends

20%
Year-over-Year Change

2013 NII Rank: 4, up one place. Ties to expanding Latin American and Caribbean economies kept Miami in the top five markets in the Index. Employment Forecast: The forecast of 16,000 additional jobs by year end assumes declining local government payrolls and muted construction hiring. However, the critical leisure and hospitality sector posted 3.1 percent annualized growth and a more vigorous housing sector will augment strength in trade. Construction Forecast: A sharp upturn in new speculative supply is forecast to add nearly 450,000 square feet by year end, but existing tenant requirements should rapidly assimilate the welcome addition of new, modern facilities.

10% 0% -10% -20%

09

10

11

12

13*

Sales Trends
$80
Median Price per Square Foot

Vacancy Forecast: Strong forecast demand of 2.1 million square feet should far outpace expected new supply, resulting in a 90-basis point decline in the vacancy rate to 6.0 percent by year end. Rent Forecast: Annualized asking rents climbed 3.5 percent to $8.33 per square foot as of the second quarter. Tighter market conditions should lift rents by 3.2 percent to $8.17 per square foot by year end. Investment Forecast: Strong market fundamentals bolstered by growing demand from tenants requiring proximity to port and air cargo distribution facilities will promote greater lease-up and re-leasing risk tolerance by institutional and private buyers, particularly given recent compression in cap rates for core properties.
Employment: 1.6% s
Special Industrial Research Report

$70 $60 $50 $40

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
Marcus & Millichap

Construction: 0.0 n

Vacancy: 90 bps t

Asking Rents: 3.2% s

page 13

Northern New Jersey

Up 3 Places

2013 Rank: 13

2012 Rank: 16

Employment Trends
4%
Year-over-Year Change Metro United States

2% 0% -2% -4%

P
13*

Sparse Construction Supporting Industrial Performance; Steady Gains Anticipated

09

10

11

12

Industrial Supply and Demand

8
Square Feet (millions) Completions Absorption Vacancy

erformance trends in the Northern New Jersey industrial market have improved from the vacancy peak in 2011. The general uptick in leasing momentum remains inconsistent and uneven, resulting in volatile net absorption trends and net losses in occupied space recorded in six out of 30 submarkets. Vacancy posted a year-over-year increase of 30 basis points to 8.9 percent as of the second quarter this year. In perspective, however, the high and growing number of significant leases suggests an increased readiness by tenants to commit to space, if they can find suitable options. The Northern New Jersey industrial market serves the Port of New York and New Jersey, the third-busiest seaport in the U.S., together with two major international airports, and is at the heart of a population of nearly 19 million. This makes it a strategic location for a variety of port- and air cargo-related activities, logistics services providers, consumer products, and food companies.

10% 9%
Vacancy Rate

4 0 -4 -8

8% 7% 6%

The lack of developable sites and high construction costs have helped maintain market stability, but tenant requirements for modern, Class A industrial space near the port often go unmet. In addition, the damage wrought by Superstorm Sandy has broadly tempered leasing demand as many companies consider alternative locations outside of the flood zone but still within the state. That said, the pre-eminent Meadowlands submarket, one of the hardest hit by the storm and still vulnerable to flooding, recorded outstanding net absorption over the past six months, driven in part by generous tax credits and grants offered by the state. 2013 Market Outlook

09

10

11

12

13*

Asking Rent Trends

10%
Year-over-Year Change

5%

2013 NII Rank: 13, up 3. Solid growth in international trade and personal consumption, together with the addition of 6,400 jobs in trade, transportation and utilities, moved Northern New Jersey ahead in the ranking. Employment Forecast: The metro gained nearly 32,400 jobs annualized as of June this year, an increase of 1.8 percent. Approximately 30,000 are forecast for the 2013 total. The unemployment rate exhibits solid improvement, down 140 basis points to 17.1 percent compared with one year ago. Construction Forecast: New supply is forecast to total 1.7 million square feet. Two-thirds of the space under construction was reportedly pre-leased as of the first quarter, leaving sparse new Class A supply. Vacancy Forecast: Demand is expected to stabilize as both global and domestic economic conditions improve. Forecast demand of 2.3 million square feet should well exceed expected new supply, resulting in a 20-basis point decline in the vacancy rate to 8.6 percent by year end. Rent Forecast: Annualized asking rents climbed 3.6 percent to $5.99 per square foot as of the second quarter. Asking rents are forecast to increase an annualized 2.7 percent to $6.07 by year end. Investment Forecast: Sales volume rose 37 percent over the past year. The median price per square foot of $63 represented a modest 2.1 percent improvement, while cap rates compressed 80 basis points to 6.9 percent. Value-add investors may seek to recapitalize and reposition older assets in infill submarkets.
Construction: 1.0M s Vacancy: 20 bps t
Marcus & Millichap

0% -5% -10%

09

10

11

12

13*

Sales Trends
$80
Median Price per Square Foot

$70 $60 $50 $40

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
page 14

Employment: 1.6% s

Asking Rents: 2.7% s

Special Industrial Research Report

Down 7 Places

2013 Rank: 11

2012 Rank: 4

San Bernardino

Inland Empire Industrial Recovery Gains Momentum as Hiring Builds Momentum

Year-over-Year Change

rguably the most dynamic industrial market in the country, the Inland Empire illustrates the broad array of drivers shaping demand for industrial space. Proximity to Southern Californias enormous population base, the largest seaports in the nation, multi-modal transit operations, and state-of-the art, cost efficient, bulk distribution space has defined the Inland Empire as a major regional logistics hub. In addition, the area continues to benefit from spillover demand from both Los Angeles and Orange County industrial markets, which remain tight with little land available to accommodate new or expanding big-box requirements. Ecommerce companies, traditional retailers, manufacturers, logistics and freight forwarding firms, consumer goods and food and beverage suppliers, with space needs that span 200,000 to 1.1 million square feet, have absorbed 36.1 million square feet between 2010 and 2012. The second quarter of 2013 also recorded 1.89 million square feet absorbed this year and a low-6.3 percent vacancy rate. The Inland Empire lost nearly 12 percent of its employment base during the recession, hurt particularly by the collapse of the housing market. The Southern California job market in general has been slow to recover and the Inland Empire is no exception. The unemployment rate remains elevated at 9.8 percent, but 260 basis points lower than one year ago. Payroll growth appears off pace in the first five months of the year, but the momentum in space commitments, rising trade volumes, and definitive housing recovery signal more robust hiring. 2013 Market Outlook

Employment Trends
6% 3% 0% -3% -6%
Metro United States

09

10

11

12

13*

Industrial Supply and Demand

20
Square Feet (millions) Completions Absorption Vacancy

16% 8%
Vacancy Rate

10 0 -10 -20

0% -8% -16%

09

10

11

12

13*

2013 NII Rank: 11, down seven places. Slow payroll growth and still-high level of unemployment brought the Inland Empire down in the Index. Employment Forecast: The Inland Empire added 34,000 jobs in 2012, or 3.0 percent. Following an early soft patch this year, payroll hiring is forecast to approach 8,000 jobs in 2013. Construction Forecast: New development, most of which is speculative and larger than 500,000 square feet, will deliver 12.5 million square feet of new product in 2013 compared with 6.7 million square feet completed in 2012. Vacancy Forecast: Forecast net absorption of 13.4 million square feet for the year should surpass new supply, resulting in 40-basis point decrease in vacancy to 6.4 percent by year end. This level of net absorption is comparable to 2010 and 2011, but well below historical norms during full U.S. economic expansion. Rent Forecast: Exceptional market dynamics stemmed a three-year, 30 percent rent slide. Since then, asking rents have achieved cumulative gains nearing 9.0 percent. Asking rents grew 3.1 percent annualized to $4.32 per square foot as of the second quarter and is forecast to grow 4.3 percent to $4.36 by year end. Investment Forecast: Transaction activity rose 18 percent over the last 12 months. The median price of $73 per square foot jumped 5.5 percent and the median cap rate compressed 80 basis points to 6.4 percent. Acquisitions by international investors and REITs have dominated recent sales activity.
Employment: 0.7% s
Special Industrial Research Report
Year-over-Year Change

Asking Rent Trends

20% 10% 0% -10% -20%

09

10

11

12

13*

Sales Trends
$80
Median Price per Square Foot

$75 $70 $65 $60

09

10

11

12

13**

*Forecast **Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Market Forecast
Marcus & Millichap

Construction: 5.8M s

Vacancy: 40 bps t

Asking Rents: 4.3% s

page 15

Capital Markets

Marcus & Millichap Research Services

Industrial Mortgage Originations by Lender

100% 75% 50% 25% 0%
Government Agency Regl/Local Bank

Percent of Total

National Bank Financial Insurance Private/Other International Bank

Elevated Spreads, Abundant Capital and Robust Lending Expand Investor Appetite

08

09

10

11

12

13*

CMBS

ast year, overall commercial real estate sales volume increased nearly 45.6 percent to $388.6 billion, a sizeable increase, but still just two-thirds of the peak 2007 volume. Industrial transactions in the first half increased a modest 4 percent to $24.1 billion. However, the level of increase also speaks to the expanding investor appetite for industrial assets. Investors for the most part have limited industrial investment to core product in primary markets, lagging the other property types relative to pushing into secondary and tertiary markets. The last six months of investor activity are noteworthy for the surge into tertiary markets where higher yields, a greater discount to replacement cost, and stronger revenue growth opportunities have offered attractive options, particularly in late-recovery markets at a time when the U.S. economy is building momentum. The low cost of debt and equity have sustained a robust capital market for industrial financing, as stronger cash flows and rising values support increased activity. Lenders attitudes have improved based on solid space fundamentals, but can still vary widely by market, class and quality of tenancy. More consistent capital has become available for Class B and B- product over the past year, but remains spotty for lower-quality, suburban assets in tertiary markets. National banks and life companies together comprised nearly three-quarters of industrial mortgage originations in 2012, primarily for loans in excess of $7 million, which extended to quality assets in secondary and tertiary markets. Based on first quarter originations, life companies will grow their market share, particularly with respect to portfolios, but CMBS conduits may compete more effectively for singletenant properties located in tertiary markets. Current debt yields range between 10 and 11 percent, underwritten with debt service coverage ratios of 1.3 or better, and loan-tovalues of 60 to 70 percent remain the norm. 2013 Industrial Capital Markets Outlook

Industrial Cap Rate Trends

12%
Industrial Cap Rate 10-Year Treasury Rate

Average Rate

9% 480 bps 6% 3% 0% 90 92 94

Cap Rate Long-Term Avg. 450 bps 500 bps 520 bps 270 bps 560 bps

10-Year Treasury Long-Term Avg.

96

98

00

02

04

06

08

10

12 13*

*Through 2Q
Sources: Marcus & Millichap Research Services, MBA, RCA

Alan L. Pontius Managing Director National Office and Industrial Properties Group Tel: (415) 963-3000 apontius@marcusmillichap.com

TEXT VERSION Debt BLACK and equity markets will remain stable for the foreseeable future, but the environment is not without risks. Sequestration will remain a drag on economic growth and a protracted environment of slowing productivity could ultimately stall progress in fundamentals recovery. The interest rate environment has driven much of the value increases, but assets values continue to rise against a backdrop of deleveraging. Accelerating income growth helps sustain values. WHITE TEXT VERSIONAAA and BBB CMBS spreads to swap will drive increased The narrowing between originations. CMBS issuance closed 2012 at $48 billion, and achieved $44 billion within the first six months of 2013. Estimates project CMBS lending to approach $90 billion to $100 billion by year end. More transactions and greater transparency will likely lift values in secondary and tertiary markets and among lower-quality assets beyond the major markets.

Prepared and edited by Marcus & Millichap Research Services For information on additional research materials, contact John Chang First Vice President, Research Services Tel: (602) 687-6700 john.chang@marcusmillichap.com Marcus & Millichap 2013 www.MarcusMillichap.com

The outlook for interest rates remains accommodative, but volatile. The Fed will likely reduce its pace of asset purchases later this year. Early signals of their intent to taper bond acquisitions has sparked significant interest rate volatility. Monetary policy will remain highly sensitive to inflation and employment trends and the Fed has noted that the target rate should remain close to zero until 2015.

Note: Employment growth is calculated using seasonally adjusted monthly averages. National Industrial Index Note: Employment and industrial data forecasts for 2013 are based on the most up-to-date information available and are subject to change.
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, Real Capital Analytics, Torto Wheaton Research Services.