Industrial vacancies were down across all three South Florida counties last year, and in land-tight South Florida, the pressure is on.
Broward County’s industrial market closed 2016 with record net absorption, the real estate sector’s yardstick for measuring industry growth. Tenants took over 2.5 million square feet of industrial space, the strongest figure seen in the past decade, according to Colliers International.
New supply, however, reached a four-year low of 491,000 square feet, while Broward’s average vacancy rate hit a 10-year low of 4.4 percent. In a world of tight supply, landlords have responded by raising rents. The average rental rate jumped $8.83 per square foot last year, a 19.5 percent increase in a year.
Broward is home to a more domestic market than Miami-Dade County. Companies operating in the aviation and pharmaceutical fields, among others, are expanding their South Florida presence in Broward.
Examples include Graybar Electric, which took 161,443 square feet at the Bridge Point Marina Mile in Dania Beach. Pet Supermarket signed for 97,000 square feet at Bridge Point Davie, and Floor & Decor inked a deal for 82,755 square feet at Bridge Point I-95 in Fort Lauderdale.
“Those are domestic firms that grew their footprint locally,” said Steve Wasserman, executive vice president with Colliers International in Fort Lauderdale.
Graybar, an industrial and electrical supply distributor, and flooring company Floor & Decor are both tied to commercial and residential development, Wasserman noted. Their growth signals confidence in Broward’s homebuilding sector.
While companies remain hungry for space, new supply has been scarce. It’s become increasingly difficult for industrial developers to build, Wasserman said. It’s difficult to secure entitled land, and the permitting process is time- consuming.
Denver-based DCT Industrial Trust joined forces with Miami’s Easton Group to build the Seneca Commerce Center in Pembroke Park. But the developers can’t break ground. A lake sits where the park will rise. The development team plans to fill about 37 acres of a lake formed by limestone mining.
“It’s indicative of how challenging it is to find land and entitlement to build,” Wasserman said of the proposed development.
The Seneca Commerce Center plans to add three buildings totaling 603,000 square feet. Two warehouses are nearby.
The lake would be filled in three phases, and the development team plans to start vertical construction on the first 222,000-square- foot facility at the end of the second quarter. The team has used the time before filling in the lake to secure county approval, said Todd Watson, senior vice president of DCT Industrial.
“I don’t think any developer goes out and says, ‘I want to fill in a lake,’ ” Watson said. “It is because we believe this is an absolute prime infill location.”
Rather than move west or further north, where the market has pushed developers looking for cheaper land, DCT chose to get creative.
“All of South Florida Is very much land-constrained,” he said, adding that the Seneca location near Interstate 95, Florida’s Turnpike and Interstate 75 appeals to regional and e-commerce users looking for warehousing space in the final leg of the distribution chain.
Some relief is on the way. About 1 million square feet of industrial property is under construction in Broward.
Miami-Dade also closed out 2016 with positive absorption. The average vacancy rate across the market was 4 percent, the same as the third quarter, according to Colliers.
Industrial users filled 2.54 million square feet of space last year. Vacancies will remain low for the next year because most of the new product is already spoken for, said Christopher Harak, a senior vice president with Blanca Commercial Real Estate in Miami.
NBCUniversal’s Telemundo inked a 550,000-square- foot lease deal with Prologis at Beacon Lakes Industrial Park, marking one of the most valuable commercial leases ever signed in Miami-Dade. Telemundo’s headquarters is under construction. KLX Aerospace Solutions signed the second largest industrial lease at Flagler Global Logistics’ Countyline Corporate Park in west Miami-Dade. Construction of the 500,000-square- foot built-to- suit facility will start this year.
The return is the thing for developers aiming to build in Miami-Dade, said Edward W. Easton, founder and CEO of the Easton Group. Pricey land coupled with high construction costs lead to a 5 percent return for a developer building and leasing a new building.
“There’s a lot of risk for that little bit of return, in my opinion,” Easton said.
Yet another 3.4 million square feet is under construction. A slight normalization is expected toward the second half of the year as new buildings are delivered, Colliers has found.
Right now rental rates stand at about $9.52 per square feet in Miami-Dade, a 7 percent annual increase.
While there’s quite a bit of supply in the pipeline, Easton pointed to a few factors that may further fuel demand over the next year. PortMiami is welcoming larger ships from the expanded Panama Canal, which carries the potential to bring in a lot more cargo in need of warehouse space.
The potential for lifting the U.S.-Cuba trade embargo is another. Further, medical marijuana may open new lines of business for the industry.
When Miami delivers its ambitious supply of condominium and apartment units this year, that will create additional demand. Easton said every new household in Miami generates demand for about 74 square feet of industrial space.
The market is solid and will remain so until too much inventory comes on the market — which he said won’t happen in the next year.
In the eyes of investors, South Florida’s industrial market is hot.
The recap from the 10th annual Industrial Owners Forum hosted by Colliers in February was, “Everybody wants to buy industrial assets in South Florida.”
Whether it’s a publicly traded real estate investment trust, an insurance company or foreign fund, the pressure to place money in South Florida is immense, Watson said.
“We are seeing at this moment a record amount of capital coming to the market looking to buy assets,” he said. “What does that do? [It’s] driving cap rates down further and further on existing assets with cash flow in place.”
But the pressures on the market stemming from the region’s land constraints makes it challenging to find a good deal.
“Miami is the most competitive market we see,” Watson said. “It’s not that large of a market and has so many constraints, yet the money coming there is absolutely ravenous.”