Industrial Is Showing Some Signs of Softening

The US industrial market is showing some signs of softening despite overall strong fundamentals, with vacancy ticking up 20 basis points in the third quarter and net absorption ringing down 132 million square feet from Q2.

New third quarter research from Cushman & Wakefield notes that vacancy is predicted to creep even higher by the end of the year, but analysts say it will remain “near historically low levels” before rising to the mid-4% range by the end of next year. Rent growth is also expected to moderate compared to the double-digit rates observed over the past year, and supply is also predicted to exceed demand over the next few quarters as the overall economic uncertainty persists and cools demand for industrial space.  In addition, “robust totals” are expected of the construction pipeline, which will make observing individual markets for signs of oversupply critical, according to Cushman experts.

“As of now, it is not an immediate risk, but one to keep an eye on given the record supply moving into a period of economic uncertainty,” the firm’s researchers write.

The speculative to BTS ratio for projects under development has also ticked up, experts say, and is nearing pre-GFC levels. However, “current market fundamentals are much stronger relative to that period with absorption levels today more than double the 2008 levels and vacancy today registering half of what it was,” the report notes. The South has 337.2 msf under construction as of Q3, more than the Northeast and Midwest combined, and 10 markets currently have more than 20 msf under construction, including Dallas/Fort Worth, Atlanta, Phoenix, Inland Empire and Indianapolis.

“While these and other inland markets have ample land to build on, other major coastal markets with land constraints will see more modest construction totals in comparison,” Cushman experts predict.