Sizzling Industrial Sector Could Face Headwinds

Industrial real estate’s record-strong fundamentals remain in place, but the sector could see some future headwinds including labor shortages and tariffs, analysts say.

Transwestern, Houston, said 43 of the 47 industrial markets it tracks posted positive absorption over the previous 12 months. Brisk absorption in most primary and secondary markets has kept the national industrial vacancy rate low, with 30 markets recording vacancy at or below the U.S average of 5.0 percent.

“After a slow start to the year, we saw a sharp uptick in consumer spending in the second quarter, which boosted e-commerce activity and contributed to job growth in the trade, logistics and transportation sectors,” said Transwestern Research Director Matthew Dolly. “In markets where absorption cooled somewhat, the issue is not lack of demand but a wait for new construction to deliver.”

Michael Soto, Research Manager with Transwestern, said U.S. ports continue to experience record-setting volumes, amplified by retailers pre-ordering merchandise due to rising trade tensions and tariffs that many fear will lead to higher-priced consumer goods. “[But,] while rising protectionism has added a level of uncertainty in the supply chain not seen in quite some time, the U.S. consumer has been resilient and the market is expected to remain strong through year end,” he said.

Colliers, Toronto, said tightening markets and new, higher-quality Class A industrial space hitting the market drove direct asking rents for warehouse/distribution space up to a record $5.81 per square foot/per year in the second quarter.

“While all indicators point to robust demand, there are headwinds increasing in volatility including labor shortages and tariffs,” Colliers said. “Occupiers’ growing demand for labor in modern fulfillment centers combined with an economy at or near full employment could delay or lower size requirements in the coming quarters or shift requirements to markets with more ample labor.”

CBRE Americas Leader for Industrial and Logistics Adam Mullen called site selection for new industrial assets “a complex exercise of weighing trade-offs including speed to customer, transportation costs, location incentives, real-estate economics and labor.” He noted site selectors should never lose sight that labor accounts for more than 20 percent of total supply chain cost. “Its importance can’t be overstated,” he said.

Discussing the potential effects possible new tariffs might have on the industrial market, Colliers said there could be declines in import and export levels in coming quarters, especially on west coast ports that rely on Chinese trade. “The shift of manufacturing from China to the U.S. or emerging exporters including Vietnam, Thailand, Bangladesh and western hemisphere countries like Brazil and Mexico could shift demand to regions of the country better suited to logistically handle these products,” the report said.