Report: Industrial real estate development grows, as does vacancy rate

Inside a package distribution center at UPS Worldport. | Photo by Boris Ladwig

In the 12 months between first quarter 2016 and 2017, building developers delivered almost 6 million square feet of space to the industrial real estate market, which includes fulfillment centers, warehouses, production, storage, assembly and clean manufacturing.

“That’s a huge number,” says Powell Spears, managing director of brokerage for real estate firm JLL. “Prior to all this growth here, a good year in Louisville would have been an additional 2 million square feet of net absorption. A great year would have been 2-and-a-half million.”

“All this growth” refers to the large industrial centers that have been built at River Ridge in Southern Indiana, in Bullitt County and on the I-65 corridor close to Louisville International Airport and the UPS Worldport.

“You can call us an Inland Port now,” says Spears, “because of UPS and the growth here of Federal Express. It only reinforces the fact that Louisville is now a proven and established distribution market. Developers from around the country used to come here, look around and go home to think about it. Now they’re staying, investing and building.”

The industrial vacancy rate in the market has jumped recently, now at 10.2 percent after a historically low 5.7 percent in 2015. But still, says Spears, we’ve had a good track record over the last five years of filling vacant space.

The reason for the rising vacancy rate is not lack of interest, he says, but because of aggressive development. In 2009-11, there was zero speculative development. “Since that time, we’ve had an explosion.”

One big story has been the expansion of UPS’s Centennial Hub, part of the Louisville Renaissance South Business Park. UPS has estimated that the $300 million project will triple the size of its packaging facility to 838,000 square feet and bring 300 new jobs. According to the company, it also will almost double the current sorting capacity to almost 85,000 packages per hour. The expansion is a multi-year, multi-phase project continuing through 2020.

Photo courtesy of UPS.

But it hasn’t been the only story, Spears says. There were also the transactions on two properties owned by Molto Properties – the sale of 645,840 square feet of Air Commerce II to Clarion Partners, a New York-based real estate investment management firm, for $42.3 million; and the lease of 645,000 square feet to Arvato Digital Services, also in Air Commerce II.

And MSRSF Investments LLC, an affiliate of Main Street Realty Inc., announced it would build a 450,000-square-foot industrial warehouse on New Cut Road near the Outer Loop, considered part of the “airport sub-market,” according to Spears.

JLL also maintains that Amazon’s decision to build its 3 million-square-foot air services hub at Cincinnati’s CVG Airport, which is actually located in Northern Kentucky, was a big win not only for the state but also for Louisville.

“This, plus the UPS expansion, guarantees that Louisville will continue to drive demand from e-commerce fulfillment and third-party logistics (3PL) users,” said the real estate company’s first quarter report.

“The way the e-commerce industry has grown, trying to forecast out 12 months is pretty difficult,” says Spears. “If you were to come to Louisville in 2011 and say you needed 500,000 or 600,000 square feet of industrial space, you were lucky to have one or two options. Today, if you said, ‘In the next six months, we’ll need to be operating out of 500,000 square feet, there would probably be a list of six or seven options.”

Of course, he says, that’s a double-edged sword – a buyer’s market that’s good for the user but highly competitive for the developers.

The current outlook, according to the JLL report:

“As product in the development pipeline delivers in the first half of 2017, vacancy rates are projected to remain inflated and rental rates will level off, at least in the short-term.

“Investment activity is forecasted to ramp up into 2018 as projects in the pipeline are leased up, and investors look for footholds in the market to add to their portfolios.”

The city’s chamber of commerce, Greater Louisville Inc., echoes that assessment about investment ramping up.

“We’ve seen a lot of investment from companies, based both in and out of town, in our region,” says Kent Oyler, president and CEO of GLI. “There’s been significant investment in new hotels and multi-family housing, as well as large distribution centers. I think that, with Greater Louisville’s well-developed infrastructure system, the completion of two new bridges and renovation of our air terminal, it makes this region very attractive to businesses looking to build.”