Ten-X: Technology Drives Industrial Vacancy Rates To Two-Decade Low

Technological shifts in the overall economy are benefiting the industrial sector and pushing vacancy rates to their lowest levels in nearly two decades, reported Ten-X, Irvine, Calif.

Ten-X said “robust” absorption drove industrial vacancies down to just above 8 percent–the lowest level since 2000. “With a narrowing supply pipeline, these vacancies appear poised to run as low as the mid-7-percent range by the end of next year, a level below their 1990’s cyclical lows,” the firm’s U.S. Industrial Market Outlook report said.

Industrial real estate’s principal technology drivers include growing e-commerce–triggering the need for more distribution and warehouse space–and rising demand for cloud server farms, Ten-X said. Energy has fallen in importance as a driver. 

“With oil prices trending near $50 a barrel, the energy sector is no longer contributing to growth in industrial real estate as in past eras,” the report said. “Marching parallel to oil prices, capacity utilization has remained stalled for several months, hovering around 75 percent.”

Ten-X Chief Economist Peter Muoio noted that technology is steadily increasing its effect on the entire economy. “It’s doing so in a way that benefits industrial real estate in a meaningful way,” he said. “In fact, our forecast indicates that technology’s positive impacts on this asset class, at least for now, are proving strong enough to offset damage caused by weak oil prices and an uninspired global economy.”

But Muoio noted that the industrial sector faces one big question mark: “potential shifts in U.S. public policy that could one day come to suppress trade flow.”

Ten-X predicted effective industrial real estate rent growth will average 3 percent or more annually through 2018. While industrial market vacancy could fall from its current 8.2 percent to 7.5 percent next year, a possible recession down the road could send vacancy levels up to 9.2 percent.

The Ten-X forecast called Nashville, Phoenix, Oakland, San Diego and Seattle the top markets for investors seeking industrial assets. The western U.S. claimed four of the top five “buy” markets, with southern California in particular benefiting from trade flows with China.

The report named Houston, San Antonio, Dallas and Fort Worth as markets with conditions most likely to motivate investors to sell industrial properties. Depressed oil prices are weighing down industrial absorption in the four Texas cities while a steady stream of supply additions puts upward pressure on vacancy rates, Ten-X said.