Thursday, November 12, 2020

Industrial Remains 2020’s Top Performer in Commercial Real Estate Sector

By Les Shaver

While most commercial real estate sectors are suffering from rising vacancies and falling rents during the pandemic, industrial keeps outperforming its peers.

Buoyed by continuing strength in e-commerce, the warehouse/distribution vacancy rate was unchanged in the Q3. It posted positive net absorption for the 40th quarter in a row.

Overall, net absorption came in at 20.74 million square feet in the quarter, increasing from 15.2 million in the second quarter. However, the third quarter’s net absorption was lower than the 41.7 million square feet posted in 2019.

Construction fell to 17.6 million square feet in the quarter, down from the 29.2 million square feet added in Q2. According to Moody’s Analytics, the vacancy rate remained unchanged at 10.5% in the Q3 but increased from 10.1% year-over-year.

Average asking and effective rents grew 0.2% and 0.3%, respectively, in Q3, which was an increase over the 0.1% both posted in Q2.

The flex and R&D space didn’t do as well in the quarter. Its vacancy rate increased by 0.2% to 10.3%, while it incurred negative net absorption. Overall, net absorption was negative 2.4 million square feet, which was an improvement compared to Q2’s 4.0 million square feet decline. 

New completions of flex and R&D space came in at 240,000 square feet, which was the lowest quarterly change since 2012. Rent growth in flex and R&D space was nearly flat at 0.1% for asking rents and 0.0% for effective rents. In Q2, the average rent grew by 0.2%, and the effective rent fell 0.1%. 

“In short, the warehouse/distribution sector is withstanding the pressures from the pandemic, while the flex and R&D sector is showing some signs of distress, similar to the office sector,” according to Moody’s Analytics. “With two full quarters into the pandemic and no end in sight, these trends of a flat warehouse and distribution and weakness in flex and R&D should continue over the next quarter and next year.”

In a separate report, Moody’s Analytics projected that industrial vacancy rates are expected to rise to 11.8% in 2021. It projects that the sector will incur its most significant drop in effective rents in 10 years, down 4.5% in 2021.

The downturn shouldn’t last long, though. Moody’s predicts that online commerce will drive a rebound in industrial. As vacancy rates decline steadily over the next five years, effective rents will rise by 1.4% in 2022.

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