The year-end reports have been coming in, covering markets throughout the Midwest. And the news is always the same: 2018 was a record-breaking year for the industrial sector. Most impressively? It looks like 2019 will be more of the same
The latest indicator is the fourth quarter 2018 MarketBeat report from Cushman & Wakefield. According to this report, industrial net absorption throughout the United States rose to an all-time high of 284.9 million square feet in 2018.
This means that the U.S. industrial sector has now notched more than 240 million square feet of net absorption for five consecutive years. That represents the strongest run this sector has ever enjoyed.
Cushman & Wakefield reported, too, that the national industrial vacancy rate fell to 4.8 percent for all product types in 2018. That is a new historic low. Average asking rents for all industrial product in the country high a new high of $6.14 a square foot.
Jason Tolliver, head of logistics and industrial research for the Americas for Cushman & Wakefield, pointed to three important reasons for industrial’s continued strong showing.
First, there’s the national economy. It grew throughout 2018, providing a boost to the industrial market. Then there’s the continued growth of ecommerce. As more companies seek to deliver products to their consumers in fewer days, the need for industrial space located close to population centers only increases.
Tolliver said that both the economy and ecommerce growth are expected to be solid in 2019. The national economy might not grow as quickly as it did last year, but the country’s economic fundamentals appear to be strong. This suggests that this year will be another strong year for the industrial market, Tolliver said.
Tolliver’s home is in Indianapolis. This Midwest market is a good example of how strong industrial is not only across the Midwest but throughout the country. Developers have added spec industrial product here. But that spec space is filling up steadily.
“Demand is outpacing supply in most markets,” Tolliver said. “In Indianapolis at the end of 2018, there was a little more supply than demand. But it really is balanced out neck and neck. In only a handful of markets where a lot of product has come online are vacancy rates up a bit more. But they are still below where they were heading into the economic downturn.”
In its report, Cushman & Wakefield says that there are no signs of overbuilding in the industrial sector. This includes in the Midwest, where new industrial construction is especially strong. According to Cushman & Wakefield, the development pipeline in the region was up 41.9 percent in the fourth quarter of 2018 when compared to the same quarter a year earlier. Even with this boost in new construction, demand for industrial product in the Midwest is outpacing supply.
Overall, Cushman & Wakefield reports that there is 275.9 million square feet of industrial product under construction, of which 191.9 million square feet is speculative. That is 70 percent more industrial facilities being built than during the five-year historical average of 104.9 million square feet.
Tolliver said that some secondary and tertiary markets have seen more new construction than others. In Indianapolis, Kansas City and Louisville, for example, developers have steadily added new industrial space. But the pattern in each of these markets has been similar: New product is built. Developers pull back. Then a wave of occupier demand takes over the new space.
The cycle then starts again with a fresh influx of new industrial product, Tolliver said.
“There is an ebb and flow in those markets,” Tolliver said. “But then you get to some of the secondary and tertiary markets that are even smaller and there isn’t a lot of industrial development at all. It is really lagging in those markets. That’s where it is challenging for occupiers to find the modern industrial space they want.”
Tolliver siad that industrial construction starts in the fourth quarter of the year slowed a bit. This indicates to him that developers are still cautious. That bodes well for anyone worried about supply outpacing demand in this sector. As Tolliver says, developers aren’t overbuilding.
Because of this, Tolliver says, the nation’s industrial vacancy rate should float near 5 percent in 2019.
“I don’t think you’ll see the vacancy rate move up yet,” Tolliver said. “The industrial market is on really solid footing.”
This is good news for owners, investors and developers, Tolliver said. The industrial market, though, is a challenging one for occupiers. They face rising rents and real estate costs.
Fortunately, while the cost of industrial real estate is rising, this cost is only a small portion of the overall costs that occupiers face, Tolliver said. The majority of companies’ supply chain costs — Tolliver says it’s about 92 percent to 95 percent for most occupiers of industrial space — come from transportation, the expense of carrying goods and labor.
“Because of this, they are able to absorb some of these rising rental rates,” Tolliver said. “They are really focused on making sure their real estate helps them minimize or control those other costs.”
This means that occupiers today are especially focused on finding the right location for their industrial facilities. Tolliver said they are willing to a premium in rent if it helps them lower their transportation costs or if a location gives them access to the best labor force.
“Occupiers are looking at their real estate differently,” Tolliver said. “They want to leverage their real estate to control other costs.”