The industrial market completed its second-best year on record in 2017, with every key indicator at or near all-time highs. E-commerce has the industrial real estate market firing on all cylinders, creating robust demand for big-box buildings, last-mile distribution centers, industrial flex space and manufacturing facilities.
Looking forward, the industrial sector could gain from both the recently-enacted U.S. tax bill and an improving global economy. However, labor constraints and uncertainty over the direction and impact of trade policies could ultimately prove to be a headwind for the sector.
- At year-end 2017, only 5.1% of the nation’s industrial space was vacant—the lowest rate on record despite 243 million square feet of new supply being completed in 2017. Product under construction remains robust at 219 million square feet, the second highest mark on record.
- The nation’s manufacturers continue to increase output and companies continue to relocate operations back to the U.S. The ISM Manufacturing Index rose to 59.7 in December as new orders surged. With “reshoring” on the rise due to consumer habits and government policies, industrial real estate with a manufacturing component will likely see increased demand this year.
- E-commerce sales grew 16% in Q3 2017 (the most recent data available) compared with Q3 2016, and now represent 10.1% of total non-auto retail sales. E-commerce sales growth will continue to be the driving force for industrial real estate in 2018.
- Warehouse space, especially in urban locations with young populations, will continue to attract top interest for both investors and occupiers in 2018. The push to service this population base will likely lead to a pickup in small warehouse construction as well as conversions of older industrial product within in-fill locations.
- Tightening markets and new, higher-quality class-A space drove up average asking rents to $6.29 per square foot per year in Q4 2017, 7.5% higher than the previous year. With vacancy rates expected to remain low because of continued strong demand, asking rental rates will continue in an upward trajectory this year.
- More than $72 billion in industrial assets changed hands in 2017, among the highest annual totals ever. Transactions were up 20% compared with the previous year and industrial assets were the only major property type to produce year-over-year gains. Investor interest will remain strong in 2018 as industrial demand continues with the highest gains seen in growing secondary markets near regional logistic hubs.
- While most signs point to continued strong fundamentals in 2018, headwinds to look out for in 2018 include a growing shortage of available labor in many U.S. industrial markets.