Third Quarter Industrial Absorption Shatters Previous Highs

The US industrial market continues to shatter records, with occupancy increasing by 540 million square feet over the last year, a new all-time high. 

The third quarter posted net absorption numbers exceeding 158.8 million square feet, the largest quarterly increase since 2008, while asking rents ticked up to $7.11 per square foot (also a new high), according to Transwestern Real Estate Services. More than one-third of the 44 markets Transwestern tracks reported double-digit percentage growth year over year. 

“We expect continued elevated net absorption as pre-leased construction projects are delivered to the market,” said Matthew Dolly, Research Director at Transwestern. “Further, the boost in rents is making redevelopment opportunities more feasible, which will benefit both core and expanding markets such as Savannah, Austin and Pennsylvania’s Lehigh Valley.”

Nearly twice the amount of industrial space is under construction now than five years ago, with national totals clocking in at 636.6 million square feet. More than a quarter of that new construction is concentrated in just six markets: Dallas, Phoenix, Atlanta, the Inland Empire, Chicago and Philadelphia.

Transwestern also notes that when measured as a percentage of existing stock, the construction pipeline signals future expansion heavily concentrated in the Sunbelt, a region that has emerged as an investor favorite over the course of the pandemic.

CommercialEdge estimates yearly delivery volumes of at least 350 million square feet through 2026. That aligns with recent estimates from YardiMatrix which forecast an annual increase in total industrial stock of between 2 and 2.3% over the next five years.

However, all that space still won’t be enough, according to some experts: in Prologis’ recent third quarter earnings call, CEO Hamid Moghadam was blunt in his assessment of the industrial sector’s supply-demand equilibrium: “With vacancies at unprecedented lows, space in our markets is effectively sold out.”

The national vacancy rate decreased to 4.7% in the quarter, with the Inland Empire, Los Angeles, Orange County and New Jersey all reporting vacancy below 3%.

“The fourth quarter will further test the resiliency of the industrial sector, as ongoing supply chain issues will be exasperated during what is anticipated to be a strong holiday spending season, and could slow new and in-progress industrial projects,” Dolly said. “It is likely that e-commerce activity will only intensify over the coming quarters, increasing the attractiveness of properties in regions that have traditionally been considered secondary industrial markets.”