Contact Us
News

Industrial’s Q2 Cool-Off Seen As Sign Of Sector Stabilization, Not Downturn

Want to get a jump-start on upcoming deals? Meet the major players at one of our upcoming national events!

An uptick in vacancies and several quarters of negative absorption isn’t enough to concern investors that industrial, one of real estate’s hottest asset classes, is facing a downturn. 

Prologis' multistory warehouse facility in the Bronx
Prologis' multistory warehouse facility in the Bronx

The U.S. industrial vacancy rate increased for a second straight quarter to 4.8% in Q2, the first instance of a consecutive vacancy increase since Q1 2010, according to Transwestern. The 86.4M SF of net absorption for the quarter was the third consecutive quarterly decline.

Despite the slower growth, industry experts believe this is a sign of stability over slowdown and remain confident in the asset class. 

“I can’t imagine absorption levels will stay at what they were for the last three years,” Transwestern Director of Research Matthew Dolly said. “They will remain strong and positive, but it’s unfair to compare at record levels.”

Dolly said the nearly 90M SF of absorption is a sign the industrial sector is maturing after a record streak. The nearly 1B SF of new supply built in the last three years wasn’t enough to meet demand, but 2019 shows signs of more modest growth.

The first half of the year was marked by slower-than-normal increases in consumer spending and uncertainty surrounding the trade war with China. 

“It’s not surprising that some companies may be a bit cautious,” Dolly said. “It’s been a disruptor with everyone thinking about it, but a lot of it has also now been factored in.”

Industrial’s Q2 Cool-Off Seen As Sign Of Sector Stabilization, Not Downturn

But a macroeconomic issue like the trade war hasn’t showed signs of having much of an impact on the industrial sector

Forty-three of the 47 markets Transwestern tracks still posted rent increases from a year ago, and Dolly said declining absorption and the slight uptick in vacancy is also due to tenants giving up older space in favor of moving to new, state-of-the-art warehouses. The report also expects a stronger second half of the year as e-commerce retailers gear up for the 2019 holiday season.

A Prologis Q2 customer survey predicts 250M SF of net absorption and 260M SF of new supply in 2019, keeping industrial vacancies around 4.5%. Net absorption was 276M SF last year.

U.S. industrial availabilities are often obsolete product and found in outlying areas rather than urban hubs where e-commerce firms compete for last-mile warehouses, according to both firms.

In Boston, what should otherwise be obsolete product is often all that’s left for a company looking to expand, according to Andrew Iglowski, the Boston-based co-founder and managing partner of The Seyon Group. 

“If you’re in the market as a tenant and looking for 36-foot clear heights and one dock per 5K SF loading, it doesn’t exist and you have to figure something else out,” he said. 

Iglowski has watched rents along Greater Boston’s Interstate 495 industrial corridor go from less than $5/SF to nearly $8/SF. The national average is a little more than $6/SF, according to Transwestern.

Closer to the city, it isn’t unheard of to find industrial space in places like South Boston and Everett, Massachusetts, renting “comfortably north” of $20/SF due to limited availability for last-mile warehouse space close to downtown Boston, Iglowski said. 

The national increase in e-commerce has emphasized the need for companies to have warehouses closer to their consumers, and it has caused urban warehouse rents to increase in cities across the U.S.

“On some buildings, you don’t even see an asking rent on the property because they get bidding wars for this stuff,” Dolly said. “When tenants come up for renewal, they get sticker shock.”

Industrial’s Q2 Cool-Off Seen As Sign Of Sector Stabilization, Not Downturn

Since demand continues to be so high in urban cores across the U.S., it would be easy to assume developers would try to flood markets with new supply. But labor shortages and land costs have prevented overbuilding. 

Instead, investors and developers are looking to new, innovative solutions in space-constrained markets.

“Growth in urban areas is likely to spur numerous approaches — all having the same end goal of getting goods to the end consumer faster,” Prologis Vice President of Research Melinda McLaughlin said via email.

“As a result, strong demand for infill real estate justifies creative development solutions such as multi-story facilities. At the same time, increasing efficiency in earlier stages of the supply chain can also help deliver higher service, which should boost demand for large, modern spaces that tend to be in outlying submarkets.”

She added technology will also improve logistical operations, but the Prologis report doesn’t anticipate a rush of overbuilding. Any major discrepancies between supply and demand should be limited to markets with a heavy concentration of big-box industrial space (buildings exceeding 300K SF). 

Another factor keeping overbuilding in check is that industrial developers often compete for land with developers of other asset classes, particularly for properties closer to a downtown area. This comes after years of industrial product getting repurposed or rezoned for loft apartments or offices.

Despite the added development competition, local players like Iglowski remain bullish on investing in industrial.

“We’re big believers in the value of urban industrial real estate,” Iglowski said. “Demand is surging and supply has been minimized through decades of gentrification and adaptive reuse of urban facilities into other product types.”