"Healthy" Number of Industrial Completions Expected for 2021

Amid the ever-increasing demand for shorter delivery times, developers are rushing to deliver new warehouse and distribution facilities, according to Moody’s Analytics

In 2020, completions finished at a record high, just over 171 million square feet. However, activity fell from 16.2 million square feet in the first quarter to 8.6 million square feet completed in the second quarter. Still, Moody’s expects a “healthy” number of completions in 2021.

Even though completions fell off, new leases and new absorption continued to rise. The second quarter ended with net absorption at 53.6 million square feet. That number is both an increase of about 20 million square feet from the previous quarter and the highest level since the first quarter of 2019.

Vacancy declined more than 60 basis points, dropping to a rate of 9.9%. That was the tightest the market has been since Q2 2019. As occupancy rose, effective rents increased 0.8%. That was 0.2% higher than the first quarter. Effective rents have already grown a total of 1.4% in the first half of the year. Moody’s projects that they are on track to reach the average annual rates in 2019 of 2.1% and in 2018 of 2.8%.

“Rent growth acceleration so far this year is apparent, and we continue to expect larger growth rates through this rest of this year,” according to Moody’s.

Second-quarter construction was spread across 12 metros, with Chicago, Detroit and Houston seeing completions over 1 million square feet. In the first quarter, it was prevalent across 22 metros. “Once again, soaring materials costs have likely contributed to construction delays as our pipeline remains robust,” according to Moody’s.

Absorption rose in 45 of 47 metros. In addition, 18 metros experienced net absorption of over 1 million square feet. Dallas, Chicago, Atlanta, and San Bernardino/Riverside posted increases in occupied space of three million or more square feet. However, San Francisco and Sacramento had declines in excess of 350,000 square feet.

Orlando, Phoenix, Raleigh-Durham, Richmond, and San Bernardino/Riverside were in the top 10 in both vacancy declines and effective rent growth. Conversely, Cincinnati, Houston, Pittsburgh, San Francisco, and Sacramento ranked bottom 10 for those metrics. Still, Moody’s says the stress is “moderate.”

Recent commentary from Prologis backs up these reports of strengthening warehouse and distribution demand.

On Prologis’ Q2 earnings call, Chairman and CEO Hamid R. Moghadam said high demand for industrial space meant the company could push pricing higher if they wanted to. The company saw a 4.1% rent growth in its US markets, which exceeded expectations.

On that same call, Chief Customer Officer Mike Curless said the competition for space among customers is as fierce as he has seen it. He added that Prologis probably wouldn’t lose much business if it did raise rents. Overall, less than 5% of customers are leaving due to higher rents. “I got to tell you the rent becomes a very minor discussion. Just the availability and accessibility of that space becomes the priority,” he said.