NEW YORK — The U.S. industrial market has absorbed a record-setting 70.1 million square feet of space in the second quarter, up 6 percent from the same period a year ago, according to Cushman & Wakefield. Year-to-date, the industrial sector has absorbed 132.2 million square feet.
The second-quarter figure marks 25 consecutive quarters of net occupancy gains for the industrial sector, with the current quarter’s absorption reaching a new cyclical high. Nationally, the industrial vacancy rate is currently tracking at 5.8 percent, the lowest level of the past 30 years and 270 basis points below the 10-year historical average.
Additionally, 38 U.S. markets reported more than 1 million square feet of absorption during the second quarter, with 11 markets recording more than 2 million square feet of absorption.
Kevin Thorpe, Cushman & Wakefield’s chief economist, says that despite a series of shocks to the U.S. economy this year and heightened uncertainty emanating from Europe, economic fundamentals remain mostly solid, which ultimately benefits the U.S. industrial sector.
“We expect to see some headwinds form in manufacturing and exporting created by the stronger U.S. dollar, but other important industrial-related indicators, such as containerized traffic flows, transportation indices, and business inventories, demonstrate that the industrial market remains on a robust path,” says Thorpe.
“In fact, the recent European-driven volatility will likely create renewed tailwinds for the U.S. property markets in the form of lower gas prices, stronger foreign capital investment, and a more real-estate-friendly Fed policy than most had expected entering into this year,” concludes Thorpe.
Landlords Push Rents
U.S. industrial rents increased 4.1 percent in the second quarter on a year-over-year basis. In fact, industrial rents increased in 68 of 79 markets tracked by Cushman & Wakefield during the period, with over one-quarter of the country now reporting double-digit gains.
In many markets industrial rents are now at historic highs, and on a national level, the United States is witnessing rental rate appreciation for every industrial product type.
John Morris, Cushman & Wakefield’s executive managing director of logistics and industrial services for the Americas, expects the industrial sector’s momentum to continue for the foreseeable future.
“While we are starting to hear speculation that the market somehow feels toppy, or mature, there remains no evidence that the positive cycle for Industrial is nearing its end,” says Morris. “Will the market slow? At some point, of course, but we do not see that on the current horizon.”
Spec Construction Dominates
On the development front, 99.9 million square feet of industrial product was delivered through the first half of 2016, with 46.9 million square feet of it coming on line in the second quarter. Major industrial markets, port cities and primary inland distribution hubs have welcomed the majority of industrial deliveries this year — industrial product that is mostly speculative in nature.
Speculative projects have accounted for 71.5 million square feet (or 72 percent) of year-to-date deliveries, and developers continue to break ground on more speculative developments as vacancy rates in many markets remain at or near historical lows. According to Cushman & Wakefield, overall there is currently 190 million square feet in the development pipeline.
Jason Tolliver, Cushman & Wakefield’s head of industrial research for the Americas, notes that both new development and leasing activity remain concentrated around major population centers and that the spec-heavy pipeline may soften spots of the market in the future.
“Even though development volumes are increasing, quarterly leasing demand continues to outpace supply,” says Tolliver. “But developers are hustling to capitalize on these hefty absorption figures. We will see some softening in markets where speculative construction is the heaviest in 2017. Frankly, the market needs the space to bring supply/demand fundamentals closer into balance.”
Top 10 Markets
In the second quarter of 2016, the top 10 strongest markets in terms of demand for industrial space included:
• Inland Empire in California (8.2 million square feet of absorption)
• Chicago (7.3 million square feet)
• Dallas/Fort Worth (4.5 million square feet)
• Atlanta (3.6 million square feet)
• Greenville, S.C. (3.6 million square feet)
• Pennsylvania I-81/I-78 Distribution Corridor (3.6 million square feet)
• Indianapolis (2.7 million square feet)
• Phoenix (2.2 million square feet)
• Central New Jersey (2.2 million square feet)
• San Francisco/East Bay (2.2 million square feet)
The 10 tightest markets in terms of vacancy rate during the second quarter included:
• Los Angeles (1.6 percent)
• Orange County, Calif. (2.3 percent)
• San Jose (2.4 percent)
• Savannah, Ga. (2.4 percent)
• San Francisco/East Bay (2.8 percent)
• Denver (3.4 percent)
• Nashville (3.9 percent)
• Cincinnati (4 percent)
• Milwaukee (4.3 percent)
• Central New Jersey (4.3 percent)
— Staff Reports