Despite the COVID-19-induced economic downturn, the industrial market is on solid ground with low vacancy rates, record-high asking rents and positive net absorption.
The pandemic increased e-commerce’s share of total retail sales, thereby increasing the demand for warehouse and distribution space. Overall industrial net absorption of 19.2 million sq. ft. in Q2 pushed the year-to-date total to 54.2 million sq. ft.
Industrial demand is highest for warehouse and distribution space, year-to-date net absorption of which totals nearly 70 million sq. ft. (more than the industrial sector’s overall gain because of negative absorption in other categories like manufacturing).
Average asking rents continue to rise, finishing midyear at $7.96 per sq. ft. —6.3% higher than this time last year. Warehouse/distribution rents rose 5.6% year-over-year to an average of $6.68 per sq. ft. These rates are all-time highs.
As lockdown restrictions were eased across the country, construction sites reopened. Projects under construction increased to 309.7 million sq. ft. in Q2 from 298 million sq. ft. in Q1. Nearly 36% of this space is preleased. Developers remain bullish on the industrial market because of its near-record low overall vacancy rate of 4.7%.
The industrial market is outperforming forecasts that projected negative absorption and lower asking rents. If current activity holds, the market may not post any negative net absorption in this downturn, unlike the six consecutive quarters of negative net absorption posted during the last recession.
The long-term outlook for industrial real estate is strong. E-commerce will remain the major driver but demand will also be propelled for the foreseeable future by diversification of supply chains away from China and companies wanting to keep more inventory on hand to guard against supply chain disruptions.