Monday, January 27, 2020

New Industrial Supply Finally Outpaces Demand

By Erika Morphy
Last year new supply in the industrial market finally surpassed demand and is expected to continue to do so for the next two years. However, industrial will remain a hotly-contested asset class by investors with North American absorption forecasted to be a healthy 459.9 million square feet through 2021 and a vacancy that will remain anchored around the 5% mark. Meanwhile, asking rents are expected to increase by 6.8% and reach a new nominal high of $6.95 per square foot by year-end 2021—up from $6.51 psf in 2019.

In addition, it adds that “Over the next several years, we expect underlying industrial market liquidity to continue to grow as investors seek to deploy record levels of capital with an increasingly favorable allocation directed towards industrial assets.”

Industrial Cooled Off In 2019
There were several factors that led to the tipping point for industrial supply-demand last year, in which new supply registered 336.3 million square feet compared to 262.1 million square feet, respectively. Last year also saw a rough start with weather-related construction delays causing a ripple effect throughout the rest of the year, thus slowing tenant occupancy. Also, a lack of quality vacant space continues to restrict net occupancy growth.

Additionally, at the start of 2019, some owner-occupiers were concerned that the market would slow after the banner year of 2018—concerns that likely caused some of the slowdown. Also, it notes, because 2018 was a record year for industrial absorption, absorption numbers for 2019 appeared low compared to the past few years.

The Years Ahead
Pressure to remain high on industrial occupancy and rent growth levels across North America, driven by a combination of strong consumer confidence, wage inflation, low unemployment, and an anticipated increase in e-commerce spending at multiple times the rate of overall spending.

It is also projected that new leasing activity will be driven in large part by traditional and online retailers as well as third-party logistics providers as consumers demand for goods at a grander and faster scale.

Some trends from 2019 and previous years will still remain in play, though. They also predicts that “some of the hottest and most talked about facilities types in the industrial world” will include cold-storage facilities, in-fill/last mile facilities, and multistory warehouses.

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