U.S. industrial property markets remained tight in the second quarter of 2019, but a swath of supply coming on-line will ease some of that tightness in the latter half of the year and into 2020, according to a report from real estate services giant Cushman & Wakefield (NYSE:CWK).
The report, which was published on July 24, affirms other forecasts of new supply – much of it “speculative” development that is built with no prior leasing commitments – acting as a moderating force for what has been a red-hot industrial market for the past eight years. Cushman classifies industrial property as warehouses and distribution centers used for logistics operations, manufacturing facilities and flex properties used for short-term purposes. Most industrial leases run three to five years.
The Cushman report underscores the market’s resilience in the second quarter on the heels of a relatively sluggish first quarter. Net absorption, the difference between square footage occupied during a specific period and the space vacated during the same time frame, totaled 52 million square feet in the second quarter, up from 36.6 million square feet in the prior quarter, according to Cushman data. Better weather conditions aided project deliveries as lessees that had postponed occupancy in late 2018 and early 2019 moved in during the spring. The second quarter net absorption figure is higher than the median quarterly level of 48.8 million through much of the multi-year expansion, Cushman said.
First-half net absorption was well below the five-year first-half average of 127.3 million square feet, Cushman said. The past five years have seen unprecedented growth in demand for industrial property fueled by the surge in e-commerce off of a very low starting point. New leasing activity for the second quarter totaled 132.7 million square feet, virtually unchanged from a year ago.
Despite the delivery of 126.8 million square feet of industrial product, vacancy rates remained historically low at 4.9 percent at the end of the quarter. That was below the five-year historical average of 5.8 percent for all product types, Cushman said. More than 54 percent of markets reported leasing activity increased quarter-over-quarter, and average asking rents for all industrial product reached a new non-inflation-adjusted high of $6.47 per square foot, according to Cushman data.
Rents for warehouse/distribution space rose 7 percent year-over-year to $5.81 per square foot, with 13 markets seeing double-digit increases, Cushman said. Vacancy rates for the logistics segment stood at 5.2 percent at the end of the quarter.
Ultra-tight U.S. markets included: Savannah, Georgia; Los Angeles and Orange County, California; and central New Jersey. These are seaport markets and major distribution hubs where space has been scarce for some time. However, Cushman noted that tight conditions are extending into so-called secondary markets as businesses sought out geographic alternatives after failing to find space in primary markets, or being priced out of those areas. For example, Providence, Rhode Island had a second quarter vacancy rate of 0.01 percent, Richmond, Virginia reported a 2.7 percent vacancy rate, and Omaha, Nebraska was at 3.1 percent, according to Cushman data.
But supply is coming fast and furious – construction starts in the second quarter increased 20.3 percent year-over-year, Cushman said. Space under construction is at a record high and is nearly 37 percent above the three-year average. Of the 327.5 million square feet under construction, 68.7 percent is speculative, reflecting developers’ confidence that space will not sit vacant for very long.
As a result, vacancy rates for all industrial products will tick up to between 5 and 5.1 percent by the end of the year, while rent growth in 2019 and 2020 will decelerate to 4.8 percent and 3.6 percent, respectively, Cushman said.