Industrial Hits Highest Absorption in More than a Year

While most sectors have slowed since early 2019, the warehouse/distribution market is still growing.

Buoyed by growth in e-commerce, the warehouse/distribution space absorbed 35.4 million square feet in Q4, which was its highest mark since Q1 2019 when 70.7 million square feet were absorbed, according to Moody’s Analytics. In Q4, occupancy growth was 28.5 million square feet, while it was 24.2 million square feet in Q4 2019. The sector has gone more than a decade since it last experienced negative net absorption in 2010.

Construction for the new warehouse/distribution space fell to 25.8 million square feet in Q4 after hitting 38.2 million square feet added in Q3, according to Moody’s Analytics. The space has posted an average of 36.8 million square feet of new inventory added per quarter in the prior six quarters. With demand increasing and supply decreasing, the vacancy rate dropped to 10.5% after sitting at 10.6% in the two previous quarters. It was higher than 10.3% in the fourth quarter of 2019.

As occupancy increased, so did rents. Asking and effective rents increased 0.4% and 0.6%, respectively, in Q4. In Q3, asking and effective rents were 0.3% and 0.4%, according to Moody’s Analytics. For the year, asking rents grew 1.3% while effective rents increased by 1.5%, below the 2.1% average asking and effective annual rates in 2019.

The flex/R&D space posted positive net absorption of 1.16 million square feet after two consecutive quarters of occupancy declines that averaged -3.1 million square feet.. The vacancy rate fell from 10.3% in the third quarter to 10.2% in Q4. It was still higher than the fourth quarter of 2019’s rate of 9.7%.

Completions of flex/R&D space came in at 424,000 square feet in Q4, after 337,000 square feet completions in Q3, according to Moody’s Analytics. In 2018 and 2019, new supply averaged 2.23 million square feet and 1.16 million square feet, respectively. With little supply growth, inventory only inched up 0.04%. Occupancy growth was 0.11% in Q4. Supply growth was 0.26% for 2020, while occupancy fell 0.39%.

Asking and effective rents grew 0.5% for both asking and effective rents in the flex/R&D space. In Q3, rents rose 0.2%, and the effective rent was flat. Average asking and effective rents grew 1.2% and 0.8% to $10.41 and $9.35 per SF, respectively.

The health of warehouse and storage also showed up in jobs numbers. The sector added 78,900 jobs since the prior peak in March 2020, a growth rate of 6.5%. The rest of the economy had a net decline of 9.8 million jobs or -6.5%.

Moody’s Analytics expects construction to grow in warehouse and storage, but at a slower rate than absorption. It suggests that vacancy rates will fall very slowly and asking should keep pace with recent quarters.

Moody’s expects the warehouse/distribution and flex/R&D markets to continue to expand for a quarter or two. However, it says people will want to return to stores at a certain point, potentially hindering growth in the sector. But it points out that many retailers are struggling and could go out of business.

Indeed, a survey of retail CFOs by global accounting firm BDO notes that many retailers are planning to cut their physical footprints in 2021. Approximately 40% of CFOs surveyed said they were reevaluating their real estate footprint this year, as high unemployment rates and stalled COVID-19 vaccination strategies have brands girding for a lengthy period of reduced consumer spending.