John Carver analyses the latest trends in the US airport real estate sector and finds out how the country's top cargo gateways are performing.
The industrial property market around the world has benefitted from some global economic uplift over the past three quarters, yet shifts in complex variables, from leaner supply chains and inventory levels to faster times-to-market and increasing fuel costs, are continuing to create a dynamic with both positive and negative implications.
This is never more evident than in the industrial real estate surrounding the US' major cargo airports.
A spike in air freight volumes in the third quarter of 2010 helped stabilise demand for warehouse and distribution space around the major cargo airports in the US.
However, much of the cargo activity was a result of a peak in the inventory cycle, especially during the rapid restocking phase early last year at the onset of the economic recovery. Now that inventories have been replenished, and global uncertainty continues to leave consumers wary of increasing their near-term spending, airport industrial real estate has been left in a holding pattern.
The picture is not gloomy, but has become increasingly stagnant. Overall vacancy rates for the top US cargo airports tracked by Jones Lang LaSalle peaked in early 2010, having steadily increased since 2007.
While vacancy has now stabilised over the last three-four quarters, with an aggregate rate oscillating between 11.2 and 11.4%, the boost from higher air freight volumes in mid-2010 has not translated into sustained improvement in leasing activity in the trade areas immediately surrounding cargo airports. Vacancy levels remain above the national average for the broad industrial sector, which ended 2010 at 10.2%.
Economic and global instability
Despite vacancy levels remaining elevated across the major cargo airports - recovery in some markets is beginning to take flight. This variable rate of recovery is evident, especially when comparing the top airports ranked by air freight tonnage. Those at the front of the pack are beginning to turn a corner, while others further down the list are taking longer to emerge from the downcycle.
Improvement can be seen in the demand for industrial real estate in the airport markets that benefit from a strong presence of fulfillment and e-commerce companies, while leasing activity in more diverse markets remains tepid.
Additionally, markets that were overbuilt heading into the recession continue to be at risk from elevated vacancy. Others that were not over-developed have been able to reduce vacancy through the aggressive actions of landlords offering concessions and rent incentives to maintain or increase occupancy levels.
However, in aggregate, the market appears to have successfully taken off, but has not yet reached cruising altitude. While there could be additional turbulence ahead in the form of rising fuel costs, global geo-political uncertainty and subpar domestic economic growth in the near-term, enough occupier demand has returned to the marketplace to help stabilise real estate fundamentals.
The magnitude and impact of these economic uncertainties, combined with local property supply and demand fluctuations, will force some industrial markets surrounding the primary US cargo airports to keep their hands on the throttle for the next several quarters.
Atlanta Hartsfield Jackson International Airport
After years of stagnation, Atlanta's airport real estate market has finally gained some positive momentum. Last year, the airport achieved year-over-year growth in cargo volume for the first time since 2004.
Every month in 2010 saw cargo volumes increase over the previous year. Total volume increased from 554,888 metric tons in 2009 to 643,503 metric tons in 2010. Recently, two new carriers, Asiana Airlines from Korea and CargoItalia from Italy, have been added to the roster while Mayor Kasim Reed has made cargo growth a top priority.
Chicago O'Hare International Airport
The airport's real estate is yet to recover; leasing activity has remained stable over the last year. Investor interest in Class A warehouse product in and around the airport is continuing. Most investors see the long-term value in airport real estate and for a long time, developers were demolishing older buildings in order to construct new ones. Yet even though this activity has halted, investors believe that the O'Hare market is still lucrative, and they can receive good rental rates despite high tax rates.
Dallas/Fort Worth International Airport (DFW)
Has been showing steady improvement with healthy net absorption of almost half a million square feet in 2010 and preliminary net absorption of 397,139sqft in the first quarter of 2011, indicating that the market should outpace last year's performance.
The vacancy rate has been trending downward over the past couple of quarters, but still remains above the Metroplex average of 11.6% due to a high level of construction activity in recent years. Average asking rents in the airport market are at $4.17 per square foot; typically 10% higher than the overall industrial real estate market average in the region of $3.54.
Indianapolis International Airport
Indianapolis' real estate market experienced healthy net absorption in 2010 and entered 2011 with a historically low vacancy rate of 5%. Online retail operations, both existing and new, find significant value in the neighbouring FedEx hub and continue to expand in the area with over 1.5 million square feet of recent new space requirements.
Los Angeles International Airport
At LA, asking rents for industrial estate is the highest of all the markets tracked, registering at $13.66 per square foot, leasing activity continues its momentum. Demand from carrier and logistics firms remains strong and land lease transactions have increased due to excess trailer space requirements as a result of strong trade flows through the local ports. Limited blocks of space for quality Class A product have spurred landlords to start some speculative development again. Vacancy rates continue to decline; while overall asking rates are high compared to other airports they have levelled out and are starting to rise in the Class A sector.
Miami International Airport
The industrial real estate market surrounding the airport has witnessed almost a 100 basis points drop in vacancy rates from the previous quarter and is currently at 9.8%.
The availability of large blocks of Class A product (100,000sqft plus) is falling faster than other submarkets in the region. As the Latin America economies remain strong and trade volumes rise, tenants see this as a good time to lock in low rental rates of good quality spaces in the airport submarket.
With the development of a large rail yard next to the airport and access to good quality railroads there is a set to be a rise in demand for logistics and distribution centre space over 2011. Overall cargo traffic through the Miami Airport was up by around 6% in January 2011 compared to the same time last year.
Memphis International Airport
America's Aerotropolis, which is supported by runway, road, rail, and river, possesses its main driving force in the airport located FedEx SuperHub.
Memphis Airport is the heart of the Aerotropolis and this area includes the Southeast, Desoto County (located in MS), and Southwest submarkets.
All three submarkets have recently experienced positive leasing momentum. Also, positive net absorption for all three of the airport submarkets over the last few quarters continues to push vacancy rates down and the supply of large blocks of space is fast decreasing as construction has been scarce in recent years.
About the author
John Carver is a real estate expert for ports, airports and infrastructure at Jones Lang Lasalle.
