Industrial Q2 Update

by | 05 August 2021

  • Absorption records have been set in back-to-back quarters. Rents are rising and vacancies are falling.
  • Dallas-Fort Worth is leading the nation in absorption, completions, and space under construction.
  • Thirty-one markets have posted absorption of at least two million square feet in 2021.
  • E-commerce, increased vaccination numbers, and improved economic conditions all signal continued strength in the industrial sector.
  • Land availability is becoming a larger issue, signaling a potential rebound in infill development.

The U.S. industrial sector shows no sign of slowing anytime soon. Previous quarter records were blown out of the water at midyear, as demand remains at all-time highs. As more people are vaccinated and businesses and retail and entertainment establishments return to “normal,” this will continue to drive demand for the industrial sector.

Economic growth at midyear was also positive — unemployment continues to trend downward and consumer confidence is expanding. The U.S. industrial sector has benefitted from these improvements, as fundamentals also set records at midyear. Overall net absorption totaled 230.9 million square feet year-to-date, with 119.3 million square feet of occupancy gains in the second quarter alone. These totals are more than double the 109.3 million square feet at this time last year and higher than in all of 2019, at 229.8 million square feet.

E-commerce growth continues to be a driving factor for industrial expansion and pent-up demand from the retail sector. In fact, retail sales are projected to grow between 10.5% and 13.5% at the end of 2021, according to the National Retail Federation.

Thirty-one markets posted occupancy gains greater  than two million square feet at midyear, including Dallas, Atlanta, Inland Empire, Chicago, and Phoenix. On the other hand, just six industrial markets had negative absorption — Milwaukee, Silicon Valley, and Portland among them. Those with the highest growth (absorption as a percent of inventory) include emerging markets such as Salt Lake City, Stockton, Las Vegas, and Memphis. Demand for logistics and distribution space, primarily fueled by e-commerce occupiers, supports the strong growth in these cities.

Year-to-date, new supply didn’t quite meet 2020 totals, falling 16%, but deliveries are expected to pick up by year-end from a full pipeline. A total of 151.5 million square feet were built during the first six months of the year, and the market is poised for another record year. Nearly 420 million square feet remain under development, almost 30% more than at this time in 2020 and 14% higher than in the previous quarter. The Dallas-Fort Worth industrial market ranks first in new development, with 13.6 million square feet delivered at midyear and 35.1 million square feet under construction.

Robust industrial fundamentals in the U.S. are expected for the foreseeable future. And despite the rise in building materials costs, industrial construction will reach record totals by year-end. E-commerce and overall retail growth will continue to fuel the need for industrial space; however, land availability remains an issue. That has created new interest in infill development opportunities, although rising costs for materials could limit development. Despite these potential challenges, the industrial market is poised for another banner year.