Industrial Hits New Records in Q3

Article originally posted on Globe St. on October 14, 2021

Absorption is shattering prior records

Industrial ended the third quarter on a record tear, with demand outpacing supply for the third straight quarter and absorption shattering prior records.

A new report from Cushman & Wakefield shows that the market absorbed 140.7 million square feet of industrial space in Q3, the most space ever absorbed in a single quarter of any year the firm has analyzed such data. That brought the year-to-date total to 365.9 million square feet, a whopping 98% above the same period in 2020 and the most absorption ever recorded in a single year.

Warehouse and distribution space continued to be the sector’s darling, with 338.9 msf of net absorption so far this year. And of the 81 industrial markets Cushman tracks, 55 have seen more than 1 million square feet of positive net absorption and 25 have posted more than 5 million square feet.

Meanwhile, new leasing activity exceeded 200 million square feet for the fourth straight quarter, bringing the year-to-date level to 667.9 million square feet.

“This level of demand is putting the market on pace to see the first year ever of new leasing activity surpassing 700 msf by year-end, which nearly happened for the first time ever in 2020,” the report notes. “It is no secret that the main driver of this level of demand is the need for more e-commerce and third-party logistics space to keep up with the amount of digital sales of consumer goods exacerbated by the pandemic. Though this trend may have accelerated due to COVID-19, it is here to stay.”

On the supply side, 246.6 million square feet had been delivered by the end of the third quarter, down 4.8% over the same period in 2020. However, completions during the quarter remained well above the five-year quarterly average. Chicago, Atlanta, Houston, the Inland Empire, Dallas/Fort Worth, Nashville, Indianapolis and Phoenix delivered the most space, accounting for 47% of all new completions, the report states.

The vacancy rate declined by 30 basis points over Q2 data and by 110 basis points year over year to hit 4.1% at the end of Q3, the lowest rate on record. The tightest markets were Inland Empire, Savannah, Orange County, Los Angeles, Central New Jersey, Philadelphia, Boston, Fort Myers/Naples and Hampton Roads, Virginia, all of which reported vacancy levels below 2%.

Rents grew in the third quarter by 8.3% year over year, for a record average of $7.18 per square foot. The West led overall rent growth at 13.4% year over year, followed by the Midwest at 9.8%. Overall, 60 of the 74 markets Cushman tracks saw rent grow over Q2 numbers, and Cushman predicts that acceleration will continue into 2022.

Cushman & Wakefield’s Carolyn Salzer predicts annual new supply will not outpace annual demand by the end of the year, saying that new supply will likely produce 15-20% less space than will be absorbed.

“This will likely change in 2022, bringing quality space to the market for occupiers to consider,” she notes.

The sector has also been an investor favorite throughout the pandemic as e-commerce exploded in popularity, driving the need for logistics space.

“Industrial properties have drawn increased investor attention over the last couple of years as e-commerce thrived during the pandemic,” Marcus & Millichap’s John Chang said recently. “The supply chain issues of recent months have also brought forth the importance of industrial property as businesses are stockpiling increased inventories to mitigate shipping and delivery risk. Industrial real estate has one of the strongest investment outlooks like investors penciling in aggressive rent gains into their valuation models.”