E-Commerce Demand Has Normalized But Still a Strong Industrial Driver

The pace of growth of e-commerce sales in the U.S. has slowed since the panic buying of the early Covid years, but its need for industrial space to accommodate fulfilment centers large and small will continue, according to CommercialEdge’s October 2023 national industrial report.

“We see e-commerce as a consistent driver of sustainable and normalized demand through the rest of the decade,” commented Senior Manager Peter Kolaczynski.

The need for industrial space is magnified by the fact that online sales need three times more warehouse space than traditional retail due to “piece picking, product variety, direct-to-consumer shipping and the need to process returns.” Both multi-million SF facilities and smaller in-fill centers for last-mile delivery will be required.

It is not just Amazon that is driving demand. Big-box stores that have incorporated e-commerce into their delivery models are also in search of space. Wal-Mart, for example, recently opened a 1.5 million SF automated fulfilment center – the second of four intended to enable the company to offer one- or two-day shipping to 95% of the population, the report said.

“E-commerce sales volume has increased by 74% since the first quarter of 2021, although almost half of those gains were made in the initial spike in the second quarter of 2021. During the second quarter of this year, there was a total of $277.6 billion in e-commerce sales, according to the Census Bureau, an increase of 2.1% over the first quarter and 7.5% year-over-year,” CommercialEdge noted.

The rate of growth of e-commerce has normalized to an average of 2.2% per quarter – it was 3.6% from 2010 to 1Q 2020 — and its share of core retail sales has risen from 14.2% in the first quarter of 2020 to 18.4% in the third quarter. However, “these figures are not inflation-adjusted, and increasing prices account for a portion of the growth,” the report cautioned.

National in-place rents for industrial space averaged $7.51 per SF in September – up six cents from August and 7.4% year-over-year. Rent growth remained high in coastal port markets, but modest rent gains were also noted in inland markets. The top markets with the slowest rent growth were Denver, Chicago, Cincinnati, Detroit, and Indianapolis. The average rate for new leases signed in the past 12 months rose to $9.93 per SF, $2.42 more than the average for all leases. Premiums were highest in port markets such as California’s Inland Empire, Los Angeles and Bay Area, but virtually non-existent in Midwestern markets.

The U.S. industrial vacancy rate rose 20 bps to 4.6% in September. Record levels of new supply have been delivered, “helping ease some of the availability crunch that made space hard to come by for many occupiers,” the report commented.

Construction activity has been strong. At the end of 3Q 23, 535.6 million SF of industrial space was being built, equal to 2.9% of existing inventory. “Industrial pipelines remain historically large in most markets,” it noted, even though starts have fallen significantly as e-commerce demand normalizes and capital becomes more expensive.

Dallas led the nation with 49.32 million SF of industrial space under construction, followed by Phoenix with 46.62 MSF and the Inland Empire with 29.58 MSF. Chicago (19.8 MSF) and Houston (18.2 MSF) were runners-up.

The bid-ask gap between buyers and sellers contributed to weaker industrial sales. They slumped from $65.4 billion in the first three quarters of 2022 to just $40.3 billion in the same period this year. That was a fall of 38%. Even so, “despite headwinds, the national average sale price has increased by $11 per square foot (9%) this year, and in some markets, prices are still on the rapid upward trajectory,” the report noted.

The three California markets – Inland Empire, ($3.36 billion), Los Angeles ($3.11 billion) and the Bay Area ($2.2 billion) – were the most active, followed by Dallas ($2.12 billion) and New Jersey ($1.85 billion).