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Logistics real estate activity breaks records in Q4

Cushman & Wakefield report notes jump in net absorption even as supply added

Logistics real estate stays hot in Q4 (Photo: Jim Allen/FreightWaves)

Logistics activity continues to dominate the industrial real estate markets, according to global commercial real estate services firm Cushman & Wakefield (NYSE: CWK). The firm’s fourth-quarter outlook report highlighted the impact e-commerce is having on demand for logistics space.

Warehousing, distribution space in high demand

The report said the fourth quarter was the strongest on record for positive net absorption, the amount of space leased over that vacated, at 90 million square feet. The warehousing and distribution segment drove positive net absorption for full-year 2020, as the sector absorbed 267 million square feet of space.

New leases of 179 million square feet were signed in the fourth quarter, pushing the full-year total to an all-time high of 659 million square feet. Logistics real estate accounted for 86% of all leasing activity in 2020, with the report pointing to digital sales as the catalyst for increases in demand for e-commerce space and new leases signed by third-party logistics companies.

A well-run e-commerce fulfillment platform requires square footage, proximity and inventory.

Many supply chains are looking to add incremental inventory to avoid the stockouts seen at the beginning of the pandemic. Additionally, e-commerce takes up to three times the space that traditional retail distribution operations require as there are no retail shelves or brick-and-mortar storefronts to store the stock. Further, many supply chains are attempting to get closer to the consumer to improve final-mile delivery capabilities and order turn times. All of these changes require more space as well as more accommodating floor plans.

New supply in 2020 increased 5.7% to more than 350 million square feet, which was the most ever reported by Cushman & Wakefield.

Even with the capacity additions, industrial vacancy rates increased only 30 basis points year-over-year to 5.2% during the quarter, which was flat with the third quarter and well below the 10-year average of 6.6%.

“Despite vacancy increasing slightly year-over-year, the market welcomed the new quality space available as demand surged in the second half of the year. The rise in vacancy is alleviating some — but certainly not all — of the pressure on the supply constrained markets,” the report said.

The report showed the tightest industrial markets were in the West and Northeast, with port markets like Los Angeles and Orange County, California, and Virginia’s Hampton Roads area, having vacancy rates at 3% or less. Philadelphia, central New Jersey, Nashville, Tennessee, Tulsa, Oklahoma, and Boise, Idaho, were listed as having similar limits on available space.

The tightness in supply drove rents 4.6% higher year-over-year, “a new record high rental rate for the U.S. industrial market,” with warehouse and distribution property rents climbing 5.6%.

The construction pipeline stood at 361 million square feet, another record, with 93.5% of the new space pegged for warehouse and distribution use. The South had 146 million square feet, the most of any region, under construction in the fourth quarter. The report referred to the pipeline as “much more conservative” compared to prior quarters, as 42.7% of the space has already been pre-leased.

Demand likely to stay elevated

Strong demand and a continuation of inventory replenishment prompted the National Retail Federation to revise its container throughput outlook over the weekend. The group said that even following what could be a record year in 2020 for twenty-foot equivalent units handled at the ports it follows, the first half of 2021 is likely to keep pace.

The NRF expects TEU throughput to increase 7.7% in January, which would be the busiest January on record, 6.1% in February and 19% in March, which is an easy comparison as Chinese factories didn’t come back online following the Lunar New Year due to COVID-19 concerns during March 2020. An April increase of 9.6% and a May surge of 21.7% round out the forecasts.

The Cushman & Wakefield report concluded that net absorption will exceed 200 million square feet in 2021 even as supply coming online outpaces demand. “Industrial supply is likely to produce around 40% more space than can be absorbed, bringing quality space to the market for occupiers to consider,” the report stated.

The change in the supply dynamic is expected to raise vacancy rates to a range of 5.5% to 5.7%, but not to a level that would disrupt pricing, which is expected to continue to increase. “Asking rents will continue to increase with positive year-over-year growth, but new supply and more modest demand will be headwinds that moderate the pace of overall rent growth,” the report concluded.

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.