In the national markets, vacancy across the US remained at record low levels, 4.3% and has now been below 5% for over 13 quarters. So said James Connor, CEO of Duke Realty Corp., in the firm’s Q1 earnings call when talking about overall fundamentals. He cited CBRE research, noting that first quarter asking rents grew an estimated 8% over the prior year nationally. For the full year, CBRE and others expect rent growth on asking rental rates to be in the 5% to 6% range.
For the first quarter, he said, supply exceeded demand by about 1.6 million square feet. “So still fairly in balance and it represents only the third quarter in the last 36 quarters, where supply outpaced demand slightly.”
He says that he sees supply and demand in balance for the remainder of the year and expect both to finish in the 200 million square foot range. “We believe this balance combined with historic low vacancy rates will continue to provide an environment for strong rent growth.”
In addition, he says, the March macroeconomic figures have been solid with favorable retail and e-commerce sales, consumer business inventories and employment data points. “Even with 2019 GDP growth projected to be in the low to mid 2% range, we still feel confident in the macro demand drivers for logistic space, like increased truck tonnage, port traffic and intermodal volume, all support a very favorable outlook.”
Now, turning to the REIT’s own results, he says that Duke followed up a very strong 2018 with a solid start to 2019. “Given the significant leasing we had in the fourth quarter of 2018, we had a comparatively light quarter, with leasing volume of 2.8 million square feet. We simply did not have that many expirations, particularly any of any size to renew or backfill. We increased our stabilized occupancy by 40 basis points to 98.4%. This was primarily driven by leasing up three speculative facilities, totaling 927,000 square feet.”
He added that “Our in-service portfolio was 95.5% leased. This is down from 96.3% in the previous quarter, which was due to speculative projects just placed in service, as well as a slight impact from acquisitions that were 72% leased. We renewed 83% of our expiring leases during the quarter, and rent growth averaged 23.4% on a gap basis and 9% on a cash basis, which was impressive given that less than 10% of this activity came from South Florida and there were no second generation leases in any other coastal markets.”
Rent growth was broad across all building sizes and all leases sizes as it has been throughout this cycle, he added. “Once again, this demonstrates that we have high quality assets in the right submarket, with a top tier operating platform, all of which we have. We’re in a position to capture demand and rent growth in all markets.”
He explained that the RIET had a good start to the year in new developments with a $165 million across five projects totaling 2 million square feet. All of these projects were speculative starts in key sub markets with tight fundamentals across our Southern California, Dallas, Houston and South Florida markets.
Looking at the landscape today, he says the company’s leasing prospect list is strong for its recently delivered and soon to be delivered spec projects. “We also have a nice backlog of build to suit projects with requirements of between 100,000 square feet to over 1 million square feet, all across the country. In aggregate, it’s possible, our pre-leasing percentage may dip slightly below 50% during 2019 due to timing, but overall, we’re very comfortable with our development pipeline and the speculative projects we have under way and their ability to contribute significant earnings growth beyond 2019.”