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E-Commerce Drives Record-Low Industrial Vacancy Rates On Both Sides Of The Atlantic

The industrial sector is on a strong performance streak in North America and the UK thanks to increased e-commerce demands. 

“There is one recurring statistic in virtually every market and country under our coverage — low vacancy rates. All but two markets posted single-digit vacancy at the conclusion of the first quarter of 2017,” Avison Young CEO Mark Rose said in a statement. 

Surging demand has some developers struggling to keep up new warehouse supply in Atlanta.

Traditional manufacturing is still a key component in industrial real estate, but the surge in online shopping by both e-tailers and brick-and-mortar players is a boon to industrial plant, distribution and warehouse assets, Rose said. U.S. net absorption reached 232M SF within the 12 months ending in March. Occupancy levels in Dallas, Los Angeles, Atlanta, Chicago, Detroit and New Jersey markets each increased 10M SF or more.

Urban markets like these have been posing challenges as of late, as users call for innovation in the industry in order to accommodate tenant and demand shifts. 

“Lack of available supply, the emphasis on the last mile in the supply chain, higher clear heights and land constraints are widespread and common issues,” said Earl Webb, president of U.S. operations at Avison Young.  

Sparse land availability and online shoppers demanding same-day delivery are changing the way much-needed warehouses in the urban core are being built. Some developers are looking to build taller warehouses with mezzanine levels to maximize space. The tightest U.S. markets were also the ones to experience the least absorption, such as cities like San Francisco that have such limited supply (29K SF).

The industrial market will have to adapt to new demands in the next cycle, as data centers, tech and distribution drive vacancy rates even lower and older properties have to be converted, Webb said. 

This strong industrial performance is not limited to the United States. Canada and the UK are both hitting record-low industrial vacancy rates. London reported a vacancy rate of 2.7% while Vancouver’s 1.9% vacancy rate overtook Toronto’s 2.2% for the lowest seen in Canada. Industrial markets in these countries are facing a supply shortage similar to America's, particularly in urban markets thanks to e-commerce. Despite this strength in performance, the U.S. remains cautiously optimistic in light of President Donald Trump's “America First” policies and what they could mean for the industrial sector. 

“The industrial market is expected to benefit from the world's largest economy,” said Bill Argeropoulos, principal and practice leader of Canadian research for Avison Young. “The caveat: uncertainty surrounding the new U.S. administration's protectionist trade policies could pose some risk to the industrial market and Canada in general.”