A big, shining bright spot for the economy these days is industrial real estate, which finished 2020 strong and shows excellent prospects for 2021, according to a report from Cushman & Wakefield.
The domestic industrial market finished the year with 89.8 million square feet (msf) of net absorption, the strongest single quarter ever recorded. This brought the year-to-date (YTD) total to 268.4 msf, surpassing the 240.9 msf reported at year-end 2019 by 11.4%.
Warehouse and distribution space was the strongest secondary type, carrying the U.S. industrial market through the year, absorbing 267.4 msf. Of the 80 markets tracked by C&W, seven saw over 10 msf of positive net absorption, and 17 markets registered over 5.0 msf of positive net absorption by year end.
New leasing activity in Q4 was 178.8 msf, propelling the annual total to an all-time high of 659.1 msf. More than half of the U.S. markets tracked by C&W – 43 of 80 — posted year-over-year (YOY) increases in new leasing activity.
In addition, 18 markets saw more than 10 msf of net new leasing activity, and 42 saw more than 5.0 msf of new leasing activity by the 2020 year-end.
Among the key drivers stimulating this level of activity were digital sales, sparking more ecommerce leasing, as well as third-party logistics providers that occupy warehouse and distribution space, the company observed.
New leasing activity in logistics space accounted for 566.5 msf, which represented 86% of all new leasing activity across all product types by the end of the fourth quarter.
New supply totaled 352.9 msf in 2020, a 5.7% increase YOY and the most space ever delivered as reported by C&W. On a quarterly basis, 97.3 msf delivered in the fourth quarter of 2020 – a little over 5.0 msf shy of the record quarter in 2019 that saw 102.3 msf, the strongest quarter ever reported.
Supply has continued to outpace overall demand since 2019, and by year-end 2020, supply surpassed demand by a little over 84 msf. Even so, vacancy rates remained tight across markets.
Of the 80 markets tracked by C&W, 10 of them – Dallas/Fort Worth, Houston, Atlanta, the Pennsylvania I-81 & I-78 Distribution Corridor, the Inland Empire Chicago, Phoenix, Indianapolis, Memphis and Columbus — had more than 10 msf of construction deliveries, accounting for 56.8% of all new completions and for more than 60% of net absorption by year’s end.
In the fourth quarter industrial vacancy rate increased 30-basis points (bps) YOY to 5.2%. Vacancy remained flat quarter-over-quarter and is still 60 bps below the 10-year historical average of 6.6% for all product types.
Despite vacancy increasing slightly YOY, the market welcomed new quality space available as demand surged in the second half of 2020. The rise in vacancy is alleviating some, but certainly not all, of the pressure on the supply-constrained markets.
The tightest markets were Orange County, Nashville, Central New Jersey, Los Angeles, Tulsa, Philadelphia, Hampton Roads and Boise – with vacancy rates of 3% or under in Q4 2020.
IRE rent growth in Q4 2020, increased 4.6% from the fourth quarter 2019. At $6.76 per square foot (psf), the Q4 2020 average rental rate set a new record high. C&W said warehouse and DC rents rose 5.6% during the same period, to $6.22 psf.
The Northeast set the pace for overall industrial rent growth among the four regions at 8.8% YOY, followed by the West with a 5.5% growth YOY. Quarter-over-quarter, 61 industrial markets saw positive rent growth or held steady while 63 markets saw increases or held steady YOY. Although the pace has slowed slightly over the past several quarters, C&W forecasts positive rent growth will continue through the end of this year.
The current industrial construction pipeline has reached 360.7 msf, another new record high for the market. Of the industrial sites under construction, 337.1 msf (93.5%) will be warehouse/distribution.
Despite the brief pause developers took towards the end of Q1 and into Q2, the pipeline has now expanded 5.8% over Q3 2020, the most recent quarter to hold the title of record high pipeline, and about 6.6% over Q3 2019. The South continues to be the region with the largest construction pipeline, with nearly 146 msf (40.5% of the total pipeline) under construction at Q4 2020.
Although the pipeline may look as though it is showing a possibility of oversupply, the ratio between speculative and build-to-suit (BTS) space tells a different story. At Q4 2020, there was only 57.3% of speculative space under construction, leaving BTS space at 42.7%, a much more conservative pipeline ratio than in recent quarters.
Just over 42% of the space under construction is pre-leased. “The remainder of the available pipeline has enough new supply to provide occupiers with additional options for growth but not so much as to drastically shift the vacancy rate, derail rent growth or undermine asset values,” C&W says.