Most Industrial Construction is Speculative These Days

By any measure the US industrial market is having a good year. A new national report from Cushman & Wakefield shows that the industrial market has posted three consecutive quarters of at least 45 million square feet in positive net absorption, a total of 159 million square feet. The third quarter has more than 61 million square feet in positive absorption, the best quarter in 2020 so far and 16% higher than in the third quarter of 2019.

Prior to the pandemic, there was some concern that new construction was outpacing demand in certain markets. Today, that fear has subsided. New industrial development appears to be controlled, and the report shows that 62% of new products is speculative. In the third quarter, new construction deliveries totaled 250.3 million square feet, an 8.1% increase over the third quarter 2019. More than 90% of that space was warehouse or distribution space.

These national numbers translate into similar activity on a market by market scale. In Chicago, where Cushman & Wakefield is headquartered, industrial construction has reached record highs during the pandemic. This summer, there were 52 projects totaling 27.2 million square feet are under construction, setting a new record for the market. In addition, 21 projects totaling 4.3 million square feet were also delivered in Q2. However, speculative development was down in the market.

To name another example, at the start of the pandemic, industrial construction in the Inland Empire, one of the largest industrial markets in the nation, was up 90% with an expectation that 26 million square feet would deliver this year. Many of those projects were continued through the pandemic.

New leasing activity this  year is also outpacing new leases in 2019. As of the third quarter, there was nearly 459 million square feet of new leasing activity, surpassing activity from the same period in 2019. For the third quarter alone, new leasing activity totaled 154.6 million square feet, a 5.4% increase over the third quarter of 2019.

However, despite the strong lease activity, the national vacancy rate continued to creep up. According to the Cushman report, overall industrial vacancy was up 20 basis points to 5.3%. This mild increase in vacancy has not increased concerns about this new construction activity or the strength of the market.

Rents have also kept confidence up. Industrial rents grew to $6.63 per square foot in the third quarter of 2020, a 2% increase over the $6.50 per square foot average lease rate in the third quarter 2019. While overall net asking rental rate growth is expected to slow, rates are still increasing slightly.