Q2 2018 U.S. Industrial Preview: Core Markets Dominate Leading to Robust Fundamentals at Midyear

by | 09 August 2018

The Q2 2018 U.S. Industrial Report will be released in the coming weeks. U.S. industrial real estate continued its positive momentum in the first half of 2018 and while there are significant occurrences that bear watching, fundamentals are expected to stay strong with record low vacancies, record high asking rents and robust activity in the coming quarters.

Key report findings:

  • Led by core markets in the Inland Empire, Chicago, Atlanta and Dallas-Fort Worth, the U.S. industrial market continues to perform exceptionally well with robust absorption and development, along with record low vacancy rates and record high asking rents.
  • The U.S. industrial market continued to perform well in the second quarter with just under 71 million square feet absorbed, the 33nd consecutive quarter of positive net absorption. This brought the annual absorption total to 122.5 million square feet at mid-year 7.7% higher than this time last year
  • The national industrial vacancy rate dropped to an all-time low of 5% despite more than 64 million square feet of new supply completed in the second quarter of 2018. Look for vacancies to remain at record lows for the remainder of 2018 despite a further uptick in new construction.
  • Tightening markets and new, higher-quality Class A industrial space hitting the market drove up direct asking rents for warehouse/distribution space to $5.81 per square foot/per year in Q2 2018, an all-time record. As the pace of development surges and final-mile demand increases, asking rents will continue to rise at a record rate.
  • The strong leasing can be attributed to multiple factors including demand in core markets. The Inland Empire was the top market for overall net absorption in the first half of 2018 at 14.4 million square feet, highlighting continued robust interest for modern distribution centers in the top e-commerce distribution market in the country. Also finishing in the top five were Chicago, Dallas-Fort Worth, Atlanta and Central Jersey.
  • The Western U.S region made gains in Q2 2018 thanks to record activity in the Inland Empire, however the Southern U.S. remains the top region for demand in the U.S. for the first half of the year, evidenced by nearly 43 million square feet of net absorption, 34% of the national total, despite having just 31% of the existing stock. The region finished midyear with five of the top ten growth markets (net absorption as a % of inventory) in the country including Savannah, the Shenandoah Valley, Huntsville, Charlotte and Charleston.
  • While the overall picture for industrial remains bright, there are significant headwinds looming in the coming quarters. The biggest downside risks concern U.S. trade policies including the NAFTA negotiations and the growing tensions with Europe and especially and China over trade tariffs and related regulations. Another headwind is labor availability. Occupier demand for labor in modern fulfillment centers combined with an economy at or near full employment could delay or lower size requirements in the coming quarters or shift requirements to markets with more ample labor.

For more detail look for our full Q2 2018 U.S. Industrial Report coming soon.

 

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