U.S. Industrial Real Estate Market Powers Through Economic Headwinds

by | 01 June 2016

As Andrew Nelson, our chief economist, put it in his blog post “The Economic ‘Recovery’ Is Over,” the U.S. economy is experiencing an imperfect recovery. Over the past year 2.8 million jobs were added. At the same time, however, the U.S. economy is growing at a slow pace. In Q1 2016, growth was estimated for GDP expansion at an anemic 0.5 percent, much lower than the adjusted GDP of 1.4 percent in Q4 2015. This mixed economic state has created interesting dynamics for the industrial sector, which despite significant headwinds—including weakened domestic manufacturing and decreased worldwide trade—looks rather healthy.

But don’t let the headlines fool you. Although it may be slow, the U.S. economy is growing, especially in the industrial real estate market. In April, many large manufactures expanded, and occupiers’ demand for space continued to outpace the available supply. Across the U.S. industrial vacancy rate have declined for the 22nd consecutive quarter to 6.3 percent, 10 bps lower than the previous quarter and 70 bps lower than this time last year. It is currently the lowest vacancy rate in over a decade. The West region posted the lowest vacancy rate in Q1 of 4.6 percent, in large part to Los Angeles’ 1.4 percent vacancy rate, the lowest in the country.

New Supply Vacancy

The demand drivers for industrial real estate are sound. Industrial tenants who want to improve logistics capabilities to meet the changing appetites of consumers are increasingly seeking modern bulk-distribution space, which is pushing new construction to an all-time high. New supply from construction completions increased in Q1 to 60.1 MSF, the most for a quarter on record. New supply represents 0.40 percent of the total existing inventory, the highest since Q4 2007’s record setting 0.47 percent of inventory.

Port activity is off to a strong start in 2016, with Los Angeles and Long Beach both posting the strongest quarter of their 109-year history. Other ports, including New York/New Jersey, Seattle/Tacoma, Virginia, and Oakland also posted calendar year-over-year gains. Ranked by absorption relative to inventory, East Coast port markets accounted for three of the top five markets. Charleston led the way with Q1 absorption representing 2.7 percent of total inventory. Savannah finished second with 1.9 percent of the total inventory being absorbed. Jacksonville finished fifth in the nation with occupancy gains of 1.5 percent of total inventory. All three markets are looking to take advantage of the increased port activity in the coming quarters following expansion of the Panama Canal in June.

Real Estate Indicators

Overall, U.S. imports should increase with solid job growth and improved consumer demand. We expect the need for new, modern industrial space will be robust, keeping absorption positive for the foreseeable future. Rent growth should also drive investment activity with foreign capital and U.S. institutional investors competing for the limited amount of inventory available.

Vacancy

For more data and analysis on the U.S. industry real estate market, check out our latest U.S. Industrial Market Outlook report.