Get Ready for Industrial Demand to Slow in 2020

Industrial continues to be the top performing real estate asset class, but next year, industrial leasing activity and user demand could slow. According to the latest letter from UCLA Anderson Forecast and UCLA Ziman Center for Real Estate, slowing economic activity and pressure from trade tensions will start to impact the market next year. The shift in market dynamics will affect speculative development specifically.

“Trade controversies will start to show up in industrial next year, not this year,” David Shulman, senior economist for the Ziman Center and UCLA Anderson Forecast, tells GlobeSt.com. “So, I believe that pure spec industrial next year will face a far more difficult environment. Obviously, deals that are pre-leased will be fine, but for purely executive projects, it will be a more difficult environment. It won’t be horrible, but it will not be as good as some of the proformas are now penciling out in terms of lease-up periods and rent.”

For the last several years, industrial has been on fire. According to the UCLA letter, industrial rents have increased at twice the pace of multifamily rents and the vacancy rate has been cut in half since the recession, now resting at 7% nationally. This activity has driven capital appetite in the market. “Rightly so,” says Shulman. “There is last-mile activity and it looks like multi-story industrial will come to the United States, and there are already a couple of projects in the works. That all continues to be good, but the economy is slowing down and trade tensions are getting worse. As those trends continue, I think that demand will be less buoyant than it has been.”

The coastal markets in particular have been the beneficiaries of the industrial boom, but when the market wans, it will also be more impacted during the slow down, especially in terms of trade issues. “I think the coastal markets will be more susceptible to the trade issues,” says Shulman. “If trade problems escalate, especially with China, that will affect the Southern California industrial market.”

However, Shulman doesn’t expect all industrial assets to be impacted. Last-mile is somewhat insulated from these shifts because ecommerce users need to be close top population centers. “The really hot industrial is the last-mile facilities, where people are paying extraordinary prices,” he says. “That will likely continue to work because next day delivery needs those last-mile facilities. So, that will likely hold up better than more traditional facilities further out in markets like Ontario.”