Industrial Vacancies Reaching Record Lows

Changes in technology, supply chains and consumer habits all continue to drive leasing demand for industrial properties–propelling the sector’s vacancies to their lowest levels on record–reported Ten-X Commercial, Irvine, Calif.

“Right now, industrial is the cream of the commercial real estate crop,” said Ten-X Chief Economist Peter Muoio, noting the trends driving the sector including e-retail and cloud computing show no signs of abating. “These new growth drivers are joined by the more traditional ones of recovering industrial production, capacity utilization, capital goods orders and trade, which has fueled vacancies and the broader health of the industrial sector to previously unseen levels.”

The Commerce Department reported industrial production rose 0.5 percent in March, slightly above expectations. Combined with February’s 1 percent rise, output expanded at a 4.5 percent annualized rate in the first quarter.

Nationally, an ongoing consumer shift toward e-commerce still drives demand for distribution and warehouse space, the report said. As a result, absorption remains “robust” and vacancies continue to shrink despite a growing supply pipeline. The national vacancy rate declined to 7.3 percent at year-end 2017, its lowest level since the initiation of coverage in 1999.

Ten-X Commercial said 2017 was the sixth straight year with industrial rent growth acceleration, but the first year the industrial sector’s rent growth outpaced the other three major commercial real estate sectors. “Industrial demand looks to remain healthy throughout this year,” Muoio said, predicting more than 10 million square feet of net absorption. Vacancies could tighten an additional 30 basis points by year-end to an even 7 percent.

The Ten-X Commercial forecast said Los Angeles, San Jose, Oakland, San Francisco and San Diego Calif, are the top markets for industrial investment. In contrast, Dallas, San Antonio, Houston, Cleveland and Baltimore ranked as the top five markets where owners should consider selling industrial properties. “These markets struggled with either a heavy supply pipeline, flagging demand or a lack of fundamental growth drivers and may face significant challenges in a projected cyclical downturn,” the report said.

As part of its analysis, Ten-X Commercial created a recessionary model to forecast potential effects of a cyclical downturn. During the years modeled, 2019 and 2020, a recession would have a negative impact on industrial absorption, but the decrease in demand would likely be less severe than the previous downturn, the report said.

During the forecasted 2019-2020 recession, vacancies could rise to 9 percent, 300 basis points below their prior peak. “Once growth returns, vacancies are expected to recover quickly while rents should bounce back and hit new highs,” Ten-X Commercial said.