Despite the continued COVID-19 related challenges facing the U.S. industrial sector, industrial real estate continued its strong momentum through midyear. Overall net absorption remained positive with occupancy gains of 104.5 million square feet year-to-date, 6.2% higher than the same time a year ago. In fact, net absorption for industrial space has not recorded negative since the first quarter of 2010. The continued growth in e-commerce sales in the U.S. remains a top demand driver for industrial real estate, fueling demand for warehouse and distribution space amid the global pandemic. As of Q2 2020, e-commerce accounted for a total of 11.8% of retail sales, up from 11.3% in the previous quarter, a record for online shopping.
While e-commerce thrives and vacancy rates hold tight across the U.S., construction activity continues to surge. Nearly 89 million square feet of industrial space delivered in the second quarter, up from 84 million square feet in the first quarter. This brings the midyear total to almost 172 million square feet delivered, up 33.5% year-over-year. Nearly 314 million square feet remain under development, roughly the same amount under construction this time in 2019. A core market, Dallas-Fort Worth, extends its dominance in the U.S. and continued to outperform at midyear. Dallas nabbed top spots for absorption, new supply and projects under construction.
The rest of the top five markets for activity were Chicago, Inland Empire, Houston, Atlanta and Indianapolis. Surprisingly, while COVID-19 impacts most sectors of real estate, the amount of industrial markets posting negative overall net absorption is decreasing. At the end of Q1 2019, 16 markets posted year-to-date negative net absorption, while at midyear, only 14 markets posted negative absorption. The markets experiencing the most activity growth (absorption as percent of inventory) include emerging markets Reno/Sparks (largely attributed to a build-to-suit delivery in the second quarter), Huntsville, Savannah, Las Vegas and Columbus.
The U.S. industrial market is on-pace to set a record year for new supply delivered in 2020, surpassing the 294 million square feet record previously set in 2018. As companies continue to make strategic decisions to keep more inventory on-hand, and e-commerce growth beats expectations, the industrial sector will continue to benefit from these trends, in defiance of the pandemic, as the rest of the economy’s recovery is ongoing.