New supply levels for industrial space will reach historical highs this year, as an expected 261.6 million square feet comes online in 2021.
New research from CommercialEdge shows that nearly 28 million square feet of industrial space has already been delivered so far this year, with another 337.8 million square feet under construction. An additional 361.3 million square feet are in the planning stages, and some experts predict it’ll take years for supply to catch up to demand.
Shipping hubs in the Midwest have the largest new supply pipelines in the US, with Memphis boasting 12.2 million square feet of industrial space under construction (5.1% of stock) and Indianapolis following with 10.3 million square feet under development and another 9.4 million square feet in planning. Together, those markets account for FedEx’s two biggest air shipping hubs in the world and benefit from cheaper land and access to FedEx air hubs, rail, and interstate highways.
Conversely, new supply is stagnating in pricey coastal markets like Orange County, Boston, and Los Angeles. If demand picks up in those markets, rents are likely to increase as vacancies tighten.
Overall, industrial rents have increased by 5.1% over the last year, according to Yardi Matrix Expert, and the average rental rate for leases signed in the last 12 months clocked in at $7.50 per square foot. The average vacancy rate was 6%, and demand skyrocketed over the course of the pandemic, driven mainly by the expansion of e-commerce in response to COVID-related shutdowns.
“We expect that demand will continue to increase even if e-commerce does not match its blistering 2020 growth rate,” CommercialEdge says in the report. “E-commerce has a continued role to play, and last year likely signaled a structural shift in consumer preferences more than temporary changes in behavior. Retail as we knew it has changed, and in its place warehousing and distribution have increased in importance.”
Yet even if e-commerce growth levels off, CommercialEdge predicts other sectors will fuel the demand for industrial space. Retailers are looking to replenish inventories, which fell substantially in the second quarter of 2020, and filling that demand will drive the need for space. That in turn will sustain rent growth, drive vacancies lower, and lead to a spike in sales volume and the price per square foot for traded assets
“Large institutions are looking to increase their exposure to industrial real estate or get into the sector for the first time,” the report says. “With the cost of capital at an all-time low and many commercial investors spurning office for the time being, we expect that industrial prices will continue to be bid up for the foreseeable future.”
The fourth quarter of 2020 rang in the highest sales volume of any quarter since CommercialEdge began collecting industrial data, with $11.9 billion in deals at an average price per square foot of $100. That’s an 18.2% increase year-over-year.