Leasing demand is being driven up by changes in tech, consumer habits, and supply chain, resulting in an all-time low for industrial vacancy.
2017 marked six straight years of accelerated rent growth, but it was also the first year recorded that saw the industrial sector’s rent growth surpass that of the other three primary real estate sectors, a Ten-X report shows.
The platform for online transactions projects steady growth all year, with more than 10 million square feet of estimated net absorption, meaning 2018’s figures would be just below the levels of the previous three years. Vacancies are expected to add an extra 30 bps to a steady seven percent.
“Right now, industrial is the cream of the commercial real estate crop, and the trends that are driving the sector – including e-retail, cloud computing and legalized cannabis – show no signs of abating,” Peter Muoio,Ten-X Chief Economist said. “These new growth drivers are joined by the more traditional ones of recovering industrial production, capacity utilization, capital goods orders and trade, which has fueled vacancies and the broader health of the industrial sector to previously unseen levels.”
The forecast suggests that California metropolitan areas Los Angeles, San Jose, Oakland, San Francisco and San Diego are prime markets in which investors could consider purchasing industrial assets.
Los Angeles has seen rewards from the constantly tight vacancies and rent growth, the West is also the hub of factors that drive demand such as legal marijuana and cloud computing. Ten-X Commercial made note of Dallas, San Antonio, Houston, Cleveland, Ohio and Baltimore as five markets where investors may want to think about selling industrial properties.
Factors such as a heavy supply pipeline, flagging demand, or a shortage of key growth drivers could be drivers of a cyclical downturn, per the report.
On a national scale, Ten-X Commercial revealed that the increasing consumer preference for e-commerce sustains demand for warehouse and distribution space. With that the case, absorption stays strong and vacancies dwindle as part of a growing supply pipeline. Since the coverage of national vacancy began in 2017, the lowest level it has ever been was 7.3% in 2017.
Ten-X Commercial also produced a recession-based model to predict the potential impact of an overall cyclical drop, and examine the potential response of multiple sectors.
The results indicated that industrial absorption would decrease for a modeled downturn from 2019-2020, though a drop in demand is not likely to be as severe as the prior downturn. During the projected recession of 2019-2020, vacancies are predicted to rise to nine percent, 300 bps under their previous peak. Vacancies are predicted to quickly recover once growth returns, while rent should spring back and attain new heights.
Trade policy uncertainty is the largest unknown factor, and therefore dangerous to the industrial sector despite an overall positive outlook.