Despite the unpredictable twists and turns of 2021 that complicated our anticipated return to “normal,” the U.S. industrial real estate market has flourished. Particularly as the end of year nears, the dangers of the Delta variant appear to be in steady decline, further supporting economic forces that have powered the industrial market throughout the pandemic. In fact, the sector is realizing its greatest performance yet: during the third quarter, an all-time high of 133.8 million square feet was absorbed nationally, driven primarily by third-party logistics and distribution occupiers.
This record absorption has caused the national industrial vacancy rate to plummet 50 basis points to a new low of 4.6 percent, the sharpest quarterly decline ever observed in the market. Meanwhile, the construction pipeline has set a new bar for the past four consecutive quarters, increasing to 431.7 million square feet during the third quarter; and average asking rents increased by nearly 4 percent quarter-over-quarter (another record) to reach $8.62 per squre foot. All of this amounts to a sector that has been booming amidst a period of macroeconomic uncertainty. What gives?
PRIMARY DRIVER
Since March of 2021, retail expenditures have spiked above the trendline that pre-pandemic spending would have forecasted. And still, this metric has room to run through the end of the year as the holiday season approaches and consumer pockets are lined with more savings than pre-pandemic levels, partly as a result of government stimulus. Consumer demand for products that need to be manufactured, shipped and stored is at an unprecedented height as many Americans are armed with cash and reactionary reasons to spend. Even when there is an inevitable correction in consumer activity, the likeliest scenario is a return to a sustainable pattern of steady growth, supporting a positive long-term outlook for industrial real estate. Further, while ecommerce’s share of overall retail sales has moderated from its height during the pandemic “pop,” it is likely to continue along the trajectory of strong annual growth, necessitating additional industrial space. According to Prologis, ecommerce sales require more than three times the amount of logistics space than brick-and-mortar retail sales.
Another complement to an optimistic outlook for the industrial sector is domestic manufacturing growth. The movement of vast volumes of goods to meet current consumer demand is stressing global logistics infrastructure, still beset by pandemic-related disruption. This volatility, when coupled with implications regarding tariffs, geopolitical concerns, and risk mitigation around climate change and natural disasters, is forcing firms to consider how to restructure their supply chains for long-term resiliency. Some manufacturers that depended on a just-in-time supply chain paradigm are adjusting to a just-in-case model; in doing so, many are moving the point of production closer to the point of consumption in an effort to reduce costs and disruption. Consequently, U.S. manufacturing reshoring, foreign direct investment, and domestic expansion are all accelerating. Overall, the shift to a just-in-case supply chain model will be additive, inciting additional U.S.-based industrial real estate for mining, manufacturing, warehousing and distribution.
KEEPING PACE WITH THE BOOM
As of third-quarter 2021, all 49 industrial markets tracked by Newmark had projects under construction, contributing to a total pipeline of 431.7 million square feet. But despite this large and growing supply pipeline, lengthening construction timelines have muted quarterly deliveries, and demand has outpaced inventory additions at a sharply increasing pace for the fourth consecutive quarter. Third-quarter net absorption was nearly double the amount of new supply, and the 73 million square feet of industrial space that was delivered during the quarter was 16 percent below 2020’s quarterly average.
Stakeholders across the industrial spectrum are keen to see groundbreakings on planned projects to meet current and future demand, but delays in obtaining construction materials are so acute that some developers have been forced to pause on projects or explore sourcing alternative materials. With vacancy now at an all-time low of 4.6 percent and all but two U.S. markets touting a single-digit vacancy rate, tenants with immediate occupancy requirements are facing a critical shortage of options in many areas. For example, California’s Inland Empire industrial market measures 651 million square feet and has the third-largest volume of development underway among U.S. markets. Yet a hypothetical 200,000-square-foot warehouse user searching for space in this market before year-end would have very few viable existing or set-to-deliver properties among which to choose, and would face many competitors vying for that same limited space.
SHORTAGE OF SPACE
One of the long-term barriers to continued, long-term market expansion is the diminishing supply of viable land sites intended for future development. With dwindling acreage available for industrial development, how can developers find opportunities for industrial expansion? Renovation of obsolete industrial properties and redevelopment of underutilized non-industrial facilities are two well-established and growing trends in many markets, especially land-constrained gateway hubs. These strategies offer solutions to supply and land constraints while modernizing market inventory. Looking longer-term, one primary strategy may include the remediation and revitalization of contaminated land sites. Regardless of what the industry does next, one thing is clear: demand for industrial real estate is on a new paradigm of growth, and significantly more industrial space will be needed to support the sector’s inevitable expansion in the months — and even years — to come.
Lisa DeNight is national industrial research director at Newmark. Read the complete Newmark third-quarter National Industrial Market Report at this link: https://bit.ly/3okedsS