U.S. Industrial Market Enjoyed Record Pace in 2016
Over 282 Million Square Feet of Net Industrial Absorption Occurred in 2016
Global property consultant Cushman & Wakefield announced this week that the U.S. industrial market nationwide absorbed 63.6 million square feet (MSF) of space in the fourth quarter of 2016, which propelled net absorption for the year to a record-setting 282.9 million square feet. The current industrial expansion is one for the record book.
As of January 2017, the industrial sector has registered 27 consecutive quarters of net occupancy gains, placing this expansion among the longest ever. It is also among the strongest, with net absorption for the past three years (825.5 MSF) surpassing the strongest period of occupancy growth in the prior cycle, 726.8 MSF from 1997-1999.
The national industrial vacancy rate for all product types continued to decline in the fourth quarter, falling 30 basis points (bps) from the prior quarter and 100 bps from the prior year to 5.5%. Over the past year, logistics-related warehouse vacancy has declined 130 bps, from 6.9% to 5.6%, despite the delivery of 156.8 MSF of new speculative product.
Jason Tolliver, Head of Industrial Research for the Americas, says the U.S. industrial market is positioned well heading into 2017 and expects more of the same. He notes that economic data reflect an increasingly confident consumer, and given solid labor markets and firmer wage growth, consumer spending should power industrial absorption, particularly for warehouse.
"When consumers are confident the industrial market benefits, and consumers ended the year upbeat with multiple measures of consumer confidence reaching cyclical highs," Tolliver said. "Considering that consumer spending is a dominant driver of industrial demand, an optimistic U.S. consumer will be a boon to industrial leasing. It's also worth noting that other important industrial-related indicators, such as containerized traffic flows, manufacturing indices, and business inventories demonstrate that the industrial market remains on a promising path."
Healthy demand from logistics and distribution users and supply constraints continue to fuel rent growth. U.S. industrial asking rents increased 3.9% in the fourth quarter compared to a year-ago. Industrial rents increased in 61 of 79 markets tracked by Cushman & Wakefield from the fourth quarter of 2015 to the fourth quarter of 2016 with over a 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 U.S. is witnessing rental rate appreciation for every industrial product type.
John Morris, Executive Managing Director of Logistics & Industrial Services for the Americas, also expects continued growth for the industrial sector. "The market continues to be strong," Morris said, "And while we are certainly all interested to see what the new administration's and new Congress' policies could mean to the overall real estate market, the industrial business continues to be fueled by the fundamental changes in how Americans work, shop and live."
On the development front, 232.9 MSF of industrial product was delivered in 2016, with 73.6 MSF of it coming online in the fourth quarter. Typically such a robust development pipeline would rebalance supply and demand fundamentals and elevate vacancy, but these are not typical times. Ecommerce continues to structurally alter supply chains and drive robust levels of leasing that continue to keep pace with deliveries. Currently, there is 215.6 MSF of industrial product under construction. Although development remains strongest in major industrial markets, port cities and primary inland distribution hubs, nearly half of the U.S. markets currently have over 1 MSF under construction.
In the fourth quarter of 2016, the top 10 strongest markets in terms of demand for industrial space were Dallas/Ft. Worth, with 5.3 MSF of net absorption; Chicago, with 4.1 MSF; Houston, with 4.1 MSF; the Inland Empire, with 3.6 MSF; Atlanta, with 3.5 MSF; Memphis, with 3.0 MSF; Stockton/Tracy, with 2.5 MSF; Nashville, with 2.5 MSF; the Pennsylvania I-81/I-78 Distribution Corridor, with 2.3 MSF; and Columbus, with 2.1 MSF.
Among the tightest markets in terms of overall vacancy included Los Angeles, at 1.4%; Orange County, at 2.0%; East Bay/Oakland, at 2.9%; Nashville, at 2.9%; Indianapolis, at 3.0%; Savannah, at 3.0%; Santa Clara County/San Jose, at 3.3%; Stockton/Tracy, at 3.4%; Charlotte, at 3.6%; and Seattle, at 3.8%.