The Strength of the U.S. Industrial Sector Persevered in the Third Quarter

by | 03 November 2020

As many real estate sectors remain challenged by the ongoing pandemic, the U.S. industrial sector continued to persevere through the third quarter. Overall net absorption remained positive with occupancy gains of nearly 165 million square feet year-to-date, 3.3% higher than the same period a year ago. Third quarter absorption of 57.2 million square feet was up 35.3% over the second quarter, which was expected to be a strikingly slow quarter. E-commerce growth continues to be a driving factor for industrial demand, as the pandemic has accelerated the trend of increased online sales by a few years. Online grocery sales have contributed to the e-commerce boom, with a recent study by grocery e-commerce specialist Mercatus projecting online grocery to expand to 21.5% of total U.S. grocery sales by 2025.

Year-to-date new supply hit a record high in 2020, surpassing the prior year by 27%. A total of 252 million square feet have been delivered at the end of the third quarter compared to approximately 198 million square feet in both 2019 and 2018. More than 328 million square feet remain under development, roughly the same amount that was under construction at this time in 2019. This puts the U.S. industrial market on pace for a record year for new supply to be delivered in 2020, to beat the 294 million square feet record set in 2018. The Dallas-Fort Worth market maintains its dominance in the U.S. and topped both new supply and projects-under-construction measures. This should come as no surprise as demand for space in this core market remains strong with the market witnessing seven new leases larger than 275,000 square feet in the third quarter alone. Additionally, three buildings under construction in Dallas are larger than one million square feet, with one of them already pre-leased to ULINE.

The Inland Empire, Dallas, Atlanta, Chicago, Houston and Columbus rounded out the top markets for occupancy gains with each posting more than 8 million square feet of positive absorption year-to-date. The markets experiencing the most activity growth (absorption as % of inventory) include emerging markets such as Reno/Sparks, Savannah, Columbus, Las Vegas and Salt Lake City. Demand for logistics and distribution space supports the strong growth seen in these cities. The Columbus market, for example, recorded absorption greater than 1 million square feet in 12 of the past 13 quarters, with the third quarter marking their highest absorption recorded in a single quarter since 2016. At the end of Q3 2020, 18 markets posted year-to-date negative net absorption, compared to 16 markets a year ago.

As e-commerce continues to be a preferred option for consumers, Amazon’s explosive growth is expected to continue. It was recently announced that Amazon’s third quarter sales surged 37% to a record $96.2 billion. The company plans to add 100,000 seasonal workers in the U.S. and Canada to meet holiday demand as they expect sales volumes to increase even higher by year end. As Amazon continues to seek space in nearly every major market, the strength of U.S. industrial real estate will continue to outpace other sectors. We expect holiday sales to provide an additional boost to the industrial market in the fourth quarter.