The first three months of the year boded well for the industrial sector, which remains red-hot, hitting record low vacancies nationally and record net occupancy gains.
There are five key trends investors and commercial real estate players should be aware of within the industry.
1. Lowest Vacancies Levels In Three Decades
National industrial vacancy levels hit 30-year lows this quarter. Vacancies continued to decline across the country by 20 basis points in Q1 to 5.3%. This is 300 basis points below the 10-year historical average of 8.3%, Cushman & Wakefield’s Industrial Market Beatreports.
2. Record Net Occupancy Gains Continue
E-commerce demand in this booming sector is pushing industrial occupancy past record levels. First-quarter net occupancy gains increased for the 28th consecutive quarter, according to C&W. This marks the longest expansion on record, with net absorption of more than 1.3B SF added since 2010. Last quarter, the sector absorbed 53.8M SF, up from Q4 2016’s 49.3M SF, though this represents a 14.4% decline in absorption year-to-year.
3. Warehouses Getting Taller Spurred By E-Commerce Demand
Developers are making warehouses taller to maximize space. These height gains are particularly critical for e-commerce companies and online players. To do this, mezzanine levels are being created to hold more inventory, CBRE reports. In the 1960s, warehouses averaged roughly 24 feet in height, but that average has jumped to 34 feet as of last year.
4. Top Buy Markets In The Sector
Tech shifts and disruptions within the industry — such as e-commerce’s continued impact and demand spurred by cloud-server farms — is particularly benefiting U.S. industrial real estate, according to online marketplace and industry researcher Ten-X in its latest U.S. Industrial Market Outlook report. Demand has spurred growth in Nashville, Phoenix, Oakland, San Diego and Seattle, each reflecting conditions likely to motivate investors to buy industrial properties. The western region has benefited from trade flows with China, though experts worry the new administration’s trade policies could stifle those flows.
5. Trump Trade Policies Spur Uncertainty
President Donald Trump’s “America First” mantra involves reworking trade deals the new administration deems detrimental to the country by boosting exports and reducing imports. In January the president signed an executive order calling for the reworking of the North American Free Trade Agreement, calling it the “worst trade deal in history.” Prior to that, Trump pulled the U.S. out of the Trans-Pacific Partnership — a deal between 12 nations that then-President Barack Obama negotiated. As these policies are solidified, companies will begin looking at their supply-chain networks to determine the impact on their operating costs, C&W head of industrial research Jason Tolliver said.
“The importance of China, Mexico and Canada as export partners makes withdrawal from the North American Free Trade Agreement or trade war with China unlikely scenarios,” Tolliver said in a statement.