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INDUSTRIAL & LOGISTICS

2020 U.S. Real Estate Market Outlook
November 19, 2019
 

TIGHT MARKET CONDITIONS CAUSE MORE RENEWALS

The U.S. industrial market will see some dramatic shifts in 2020. Absorption gains will be difficult to achieve with extremely low vacancy rates and limited space options in several markets. Consequently, net absorption will be lower than in previous years. Anecdotally, we are seeing higher-than-normal renewal rates, particularly in the markets with the lowest vacancy rates, and this trend should continue if not accelerate in the near term. Overall, the market will remain stable as e-commerce penetration continues to impact supply chains. As operations become more complex for occupiers, there will be a heightened focus on outsourcing, paving the way for growth in the third-party logistics (3PL) sector.

SHIFT IN SUPPLY/DEMAND FUNDAMENTALS

Considering there will be more renewal activity and fewer leases for new space, the consensus between CBRE Research and CBRE’s I&L business is that supply will outpace demand by 20 million to 30 million sq. ft.—the first time there will be an overhang of space since the 2008 recession, albeit representing only 0.2% of total industrial inventory. The vacancy rate may increase slightly, but should remain near historic lows in 2020.

STRONG RENT GROWTH FROM NEW CONSTRUCTION AND INFILL

Despite some softening in the market, CBRE forecasts rent growth of 5% in 2020, on par with previous years. Rising rents will be driven by newer product and infill industrial space in supply-constrained markets. High-quality, first-generation Class-A warehouse space typically generates a rent premium. And demand for light-industrial warehouses of less than 120,000 sq. ft. will accelerate as e-commerce companies race to offer same-day delivery to customers. These properties have seen rents rise by 30% in the past five years, whereas big-box rents rose by 15%. Considering that space is very limited in the smaller-size segment, rent growth is expected to continue over the next 12 months.

FIGURE 10: HISTORICAL AVERAGE ASKING RENT GROWTH & FORECAST

2020-Market-Outlook-Industrial-Logistics-FIG10-01

Source: CBRE Research, CBRE Econometric Advisors, Q3 2019.

LIMITED EFFECTS OF TRADE CONFLICT

Should the U.S.-China trade conflict persist or deepen, economic growth may suffer and have a negative impact on I&L markets. Nevertheless, I&L market fundamentals remain extremely strong, and trade with China—while important—is not the only demand driver.

If trade tensions continue, two factors must be watched: consumer spending, which has a direct impact on industrial market dynamics, and supply chain restructuring, whereby import sourcing shifts largely from China to other countries like Vietnam, Malaysia and India. Uncertainty will drive growth in the 3PL segment of the industrial market as companies outsource their operations. This will translate into more 3PL leasing activity—a trend that is already underway.

MARKETS TO WATCH

As user dynamics change with supply-chain growth requiring more facilities across industrial hubs, several secondary markets are becoming desirable from an investment perspective. The major risk to investors in smaller, secondary markets is oversupply and lack of liquidity. Based on an examination of key metrics,1 CBRE has identified Charlotte, Cincinnati, Denver, Louisville, Orlando, Portland, St. Louis and Tampa as key secondary markets that will offer strong liquidity and relatively high income returns in 2020.

1.New industrial supply relative to the amount of existing inventory, 2014-2018; NCREIF income returns, 2014-2018; net absorption vs. construction completions, five years; current Class A cap rates, Q2 2019; RCA liquidity score, 2014-2018.

FIGURE 11: KEY EMERGING MARKETS, SUPPLY VS. DEMAND

2020-Market-Outlook-Industrial-Logistics-FIG11-01

Source: CBRE Research, Q3 2019.

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Contributors

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Richard Barkham, Ph.D.
Global Chief Economist & Head of Americas Research
+1 617 912 5215
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Spencer Levy
Chairman, Americas Research & Senior Economic Advisor
+1 617 9125236
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David Egan
Head of Industrial & Logistics Research, Americas & Global
+1 312 9351892
+1 312 9351880
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Matt Walaszek
Associate Director
Research
+1 312 297 7686