Reis: Industrial Sector Momentum Slows

The industrial market’s momentum slowed a bit during the third quarter as demand growth decelerated, reported Reis, New York. 

But vacancy held steady in the warehouse and distribution subsector as net absorption exceeded new construction by a small margin, Reis Economist Barbara Byrne Denham said in Reis’s First Glance report. 

Byrne Denham noted that vacancy declined in the sector’s Flex/R&D subsector mostly due to a sharp new construction drop. Flex/R&D net absorption slowed somewhat but remained positive, she said. 

“Market rents increased but also at moderate rates, similar to the second quarter,” Byrne Denham said. “Once again, every metro posted positive rent growth for the quarter, although some outperformed others.”

The industrial sector has outperformed other property types in occupancy growth in recent quarters, but the third quarter “down-shift” observed puts the asset class on par with office and retail, Byrne Denham said. “Still, the outlook on industrial remains more favorable as the ecommerce industry is still evolving,” she said, noting that Amazon recently announced a new food store concept which should boost demand for warehouse and distribution space.

Reis reported that industrial sector net absorption fell to 14.7 million square feet in the third quarter, down from 21.8 million in the second quarter and 28.9 million square feet one year ago. While demand continued to decelerate compared to 2015, new construction slowed as well, falling to 13.4 million square feet in the third quarter compared to an 18.2 million square foot average over the previous five quarters.

Byrne Denham called the “tepid” pace of industrial market growth in line with national economic statistics. “However, some statistics related to industrial demand have improved of late,” she said, noting that aggregate trade increased to $308 billion (on average) from June through August, up from a sub-$300 billion average over the prior three months.

In addition, Byrne Denham noted that the Institute for Supply Management’s purchasing managers’ September index reading of 51.5 indicated that manufacturing sector economic activity expanded during the month. The PMI has expanded nearly every month this year. 

Looking forward, “the slow but steady rate of growth should continue going forward as most metros continue to see demand growth for industrial space,” Byrne Denham said. “With limited new construction in most markets, vacancy should hold steady and continue to decline for Flex/R&D [space].”