Industrial Market Strong Despite a Break From Record Activity
Following a record-setting 2016, the U.S. industrial market held strong in the first quarter of the year. Overall net absorption helped drop the vacancy rate to an all-time low while demand kept new development solid and pushed asking rental rates to an all-time high.
Looking forward, it appears trade policy fears have waned and will not affect supply chains in the near term. This, along with solid economic conditions and the continued need to modernize supply chains, should keep industrial fundamentals robust in the coming quarters.
- U.S. e-commerce sales grew 15% in Q1 2017 over Q1 2016 and now represent 8.5% of total retail sales. E-commerce will continue to be a driving force for industrial real estate in 2017.
- At the end of Q1 2017, only 5.4% of the nation’s industrial space was vacant — the lowest rate on record despite 55 million square feet of new supply completing in Q1. Product under construction declined from its record levels at year-end 2016 to 198 million square feet in the first quarter.
- Manufacturing space — and warehouse space that can handle a manufacturing component — remains a product type to watch in the coming year. With reshoring on the rise in part due to anticipated government policies, industrial real estate with a manufacturing component will likely see increased demand for the foreseeable future.
- Tightening markets and new, higher-quality Class A space drove up industrial asking rents to $6.10 per square foot per year in Q1 2017, an all-time record for the country (not adjusted for inflation). With new development slated to decrease slightly in 2017, vacancies will likely continue their downward trend and put further pressure on asking rents.
- Nearly $14 billion in industrial assets changed hands in Q1 2017, 3% higher than this time last year. With limited product available to purchase in core markets and fundamentals improving at a rapid pace in non-core areas, we expect sales to continue to rise in secondary and tertiary markets in the coming quarters.
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