There is something about the middle of any year that always provides an interesting opportunity to evaluate where the commercial real estate market has been—but more importantly, what the future will hold.
For major industrial markets across the United States, there is very little indication that current momentum will cease any time soon. An extraordinary level of demand continues to exceed supply—this is true for investments, available land, or highly functional, well located logistics space for lease. While every submarket is unique, record breaking absorption, rent growth, and limited opportunities are leading conversations.
Based upon these factors, the outlook for the remainder of 2019 will be more of the same, presenting both challenges and opportunities for everyone from brokers and developers to the businesses that occupy industrial space.
More Shock & Gridlock for Occupiers
Primary markets with sophisticated supply chains and large populations continue to see the majority of logistics-related demand. However, the limited number of options for today’s tenants presents one of the greatest challenges to our industry. According to a recent report from CoStar, the U.S. national industrial vacancy rate was 4.9 percent at the end of Q1. There are also several major sub-markets, including Los Angeles and New York City to name only a few, that sit well below the national average. With massive increases in rents over the last five years and a finite number of options available in the market, companies are coming to grips with a new normal—not only in terms of the increased expense in the form of rent, but the likelihood of having to relocate to other submarkets in pursuit of the right facility to accommodate growth.
No Land, Rising Construction & Labor Costs
Developers continue their best efforts to bring new product to the market. Kidder Mathews and other respected sources are consistent in their estimates of over 280 million square feet of industrial space currently under construction or in the pipeline, a 4.2 percent jump from last quarter. With these new deliveries, we will naturally see minor adjustments to vacancy and absorption. Yet, the industry also faces massive constraints due to the limited amount of land available. The corresponding rise in values, construction, and labor—while not new trends—could be viewed as emerging headwinds. As a result, expect significant growth prospects to emerge in secondary markets.
Technology & Further Disruption
The commercial real estate industry as a whole is bracing for more change—much of this being influenced by tech advancements and consolidation. The extensive use of technology, evolving business models, and changing investor and tenant expectations are all redefining our landscape at an accelerated pace. Companies will have to realign priorities and adapt to new demands. The most nimble and creative will see a major competitive advantage as they win away customers, top talent, and corresponding profits.
Not surprisingly, everyone is on the hunt for any signals of the next recession. With increasing concern, the industry’s focus on a potential downturn could ultimately lead to one. As worried businesses and consumers take steps to reduce spending, we could unintentionally create our next condition.
The good news is that for now, CRE professionals should plan to continue to ride the wave as the economy holds steady. Looking ahead, for industrial—we can fully expect strong demand to remain for the foreseeable future. Perhaps a period of adjustment and stabilization, but there is little indication that our market is officially running out of steam.