Net Absorption Rebounds in Q2 2019 but Remains Below Last Year’s Pace

by | 29 July 2019

Overall net absorption rebounded in Q2 2019, with occupancy gains of 60.9 million square feet, much higher than the first quarter’s 42.1 million square feet. Year to date however, the 102.9 million square feet absorbed remains 16% lower than the same time a year ago. While the pick-up in net absorption in Q2 2019 is welcome news, the fact that 2019 net absorption remains well below 2018’s pace signifies that we are past the peak of this cycle. Despite a drop in activity compared with the previous year, fundamentals for industrial real estate remain solid with record low vacancies and record high asking rents and product under construction.

One trend that continues is the industrial market’s reliance on new construction for positive net absorption. Because of tenants’ insatiable demand, core markets — especially markets with land available to develop — are doing exceptionally well. Case in point is Dallas-Ft. Worth, who finished midyear with the most construction completions (14.2 million square feet), product under construction (28.4 million square feet), and not surprisingly, took the top spot for overall net absorption at 12.9 million square feet. The other top markets for net absorption, including the Inland Empire (11.1 million square feet) and Chicago (8.9 million square feet), completed a significant amount of new construction.

Markets with robust new development did well the first half of 2019. 30 markets posted positive net absorption greater than one million square feet, with 23 of these markets completing more than one million square feet of new construction. Many of the top growth markets (net absorption as a percent of inventory), including Savannah, Greenville/Spartanburg/Anderson, Reno/Sparks and Salt Lake all posted robust new construction. On the flip side, markets with low to minimal new construction had a weak first half. At midyear, 20 markets (the highest since 2014) posted negative overall net absorption, 15 of which had construction completions less than one million square feet.

The good news for the U.S. industrial market is a record 306 million square feet is now under construction and many of the 20 markets that posted negative absorption have larger amounts of new inventory in the pipeline. While this means net absorption will increase significantly in the coming quarters, a question to be answered will be if there will be an influx of Class B vacant product hitting the market and if redevelopment of older product will increase, due to the growing tenant demand for new product with modern amenities. This will be a major question for the industrial market going forward.

James Breeze is the national director of Industrial Research for Colliers International, where he focuses on analyzing industrial property trends, compiling Colliers’ thought leadership and delivering timely market projections to provide clients with a leading edge in our industry.