CHICAGO – Robust absorption, declining vacancies and rising rental rates reflect continued progress for the U.S. industrial real estate market through the first quarter of 2014, according to commercial real estate services firm Cushman & Wakefield’s latest research findings, released this week. And while tightening supply may have contributed to a slowdown in leasing velocity through January, February and March, the nation’s industrial construction pipeline has ramped up to meet strengthening demand.

“First quarter performance continued the notable progress industrial real estate experienced in 2013,” noted Cushman & Wakefield’s John Morris, leader of Industrial Services for the Americas. “Domestic manufacturing continues to gain traction, driving increased production and shipments, and electronic fulfillment continued to expand. As a result, the economic environment for our sector is the best we have seen in many years.”

In fact, industrial space occupancy gains rose 31 percent year over year, with 30.5 million square feet of absorption, compared to 23.2 square feet in the first quarter of 2013. Atlanta led the nation, with 5.1 million square feet of absorption, followed by the Inland Empire, with 4.6 million square feet. The U.S. overall industrial vacancy rate continued to trend down, ending the quarter at 7.4 percent, 80 basis points lower than one year ago.

“Availabilities are dwindling, especially in the highly competitive big-box market,” Morris noted. “This is holding industrial leasing in check. Only 11 out of the 38 markets tracked by Cushman & Wakefield posted increased activity year-over-year.”

Greater Los Angeles continued to lead the nation in leasing volume, with 7.7 million square feet in activity through March (down 16 percent year over year), followed by Dallas/Fort Worth, with 6.8 million square feet (up 13 percent year over year). Seven markets posted double-digit gains during the first quarter, with Northern New Jersey up 43 percent year over year, and Philadelphia recording a 74 percent increase.

A shortage of top-tier industrial space has placed continued upward pressure on rents. Average asking rates grew in most major markets tracked by Cushman & Wakefield, with the national direct average climbing from $5.73 per square foot to $6.03 per square foot during the past 12 months. Houston led the way with a 10.3 percent year-over-year average rent increase.

“The supply/demand imbalance also continues to fuel construction activity, including both build-to-suit and speculative product,” Morris noted. “Virtually all of the top markets are seeing construction pipelines return to near pre-recession levels.”

Dallas/Fort Worth and California’s Inland Empire are leading the nation in construction, with 16.5 million square feet and 14.8 million square feet of total volume, respectively. In Dallas/Fort Worth, 14.4 million square feet of that total is being built on spec. Of the 85.8 million square feet of total development expected to be completed nationwide by year-end 2014, 51.7 million square feet is speculative.

“Moving forward, we are watching a number of private sector developments that will likely add near-term momentum to the industrial real estate market’s positive trending,” Morris said. “Among them, we anticipate a continuing revival of the housing sector, the activation of pent-up consumer demand and rising export volume. Most importantly, we are beginning to see a shift in business attitudes and a greater willingness to take risk, which will lead to stronger employment growth and increased investments in people and equipment.”

Lowest National Industrial Vacancy Rates

* Indicates change in “percentage points” from prior year (not percent).

September saw robust investor interest and activity among small users for industrial properties representing 40% of the commercial transactions in Pima County for the month, an aggregate of almost $11 million. Of these sales, most were cash and carryback buyers, with uses ranging from space for personal collections to small business expansion.  Investors are speculating industrial lease opportunities, which were also on the rise in 3Q.

According to new research from Cushman & Wakefield in New York City, despite the notion that manufacturing has basically left the United States, the industrial sector—by several measures—is alive and well. Nationwide, through the third quarter, warehouses have experienced fourteen consecutive quarters of declining vacancies. The momentum is supported by continued strong leasing velocity and absorption, and construction levels that already have surpassed last year’s total.

With indicators of equipment acquisition and economic optimism trending positive in the September 2013 data, the Equipment Leasing and Finance Foundation (ELFF) expects some acceleration in the second half of the year, despite slowdowns in the first and second quarters. ELFF forecasts a 4.8% growth in equipment investment this year. This number is actually quite marked from last year, having jumped 5.2% in the first half of the year. By contrast, it also notes the U.S. economy still facing stiff challenges, and predicts the U.S. economy to see a modest 2% growth rate.

The other factors pointing to a recovery in the second half of the year for this sector is increased economic optimism coupled with improving credit markets that are providing businesses with easier access to credit.

The uptick is due to renewed consumer confidence, contends John Morris of Cushman & Wakefield. “Pent-up consumer demand for housing, automobiles, appliances and other less durable goods have translated to increased spending in 2013. As corporations respond, we have seen a jump in demand, especially for distribution space. With the continued ecommerce boom, online retailers have become the fastest-growing segment of warehouse occupiers. At the same time, traditional brick-and-mortar retailers continue to drive demand, with companies like Walmart and Home Depot among the most active.”

Industrial leasing volume increased in the third quarter and strength is broad based, Southern California, Dallas and Chicago were particularly strong. Greater Los Angeles continued to lead the nation with 28.1 million square feet leased year-to-date, followed by Chicago with 24.4 million square feet. Twelve of the 37 markets tracked by Cushman & Wakefield have reported increased activity in 2013, including 11 that experienced double-digit annual increases. Northern New Jersey posted a 37% year-over-year leasing increase, while Dallas/Fort Worth recorded a 28.2% increase.

To read the more of the Tucson report as published in the October TAR Scorecard click here.

To read the Cushman & Wakefield report as published in GlobeSt.com click here.