The industrial real estate market is scorching hot these days. That came through in a new report on the sector by Cushman & Wakefield. It noted that the third quarter was another record-breaking one for the industry, with demand, rents, and its construction pipeline at new highs.
All this means the industry is building new space as fast as it can. However, even with that building boom, supplies aren't keeping up with demand, which suggests that rents will likely continue growing in the coming quarters.
A building boom
Developers completed 99 million square feet of industrial space during the third quarter. That's well above the five-year quarterly average for deliveries of 75.6 million square feet. Completions were also higher than the first two quarters of the year.
The construction of new industrial space is relatively widespread. Cushman & Wakefield noted that 51 of the 81 markets it tracks delivered more than 1 million square feet of new industrial construction by the end of the third quarter.
However, 47% of the completions came from the following markets:
Most of those metro areas are in the Sun Belt region, which is benefitting from above-average population and employment growth.
Completions will likely continue rising in the coming quarters. Developers currently have a record 521.4 million square feet in their construction pipeline. That's the first time the industry's pipeline has exceeded 500 million square feet. The bulk of this pipeline is additional warehouse/distribution space, at 94.4% of the total. The South continues to see the most activity, with 42.8% of the construction pipeline located across that region of the country.
Most of the space currently under construction (70%) is speculative. While that might hint at a potential for oversupply in the coming quarters, that seems unlikely, given that demand is currently outpacing new supply.
Still not enough space
Despite the current building boom, the industrial real estate market is tight because demand is growing faster than new supply. The market absorbed a record 140.7 million square feet of space during the third quarter. That marked the third straight quarter that demand outpaced supply.
This means vacancy rates continue to fall. The sector's overall vacancy rate hit 4.1% in the third quarter, down from 4.4% in the second quarter.
Meanwhile, several markets are even tighter. The following markets all reported vacancy rates below 2%:
"With vacancies at unprecedented lows, space in our markets is effectively sold out," according to comments by Hamid Moghadam, the CEO in industry-leading industrial REIT (real estate investment trust) Prologis (NYSE: PLD) in its third-quarter report.
That's driving up rental rates. Cushman & Wakefield noted that "fierce competition for space" brought another quarter of rent growth. Overall, industrial rents rose 8.3% year over year, pushing the average rental rate to a record high. Prologis noted that current market rents are 22% above its in-place rents. Because of that, it expects to benefit as existing leases expire, and it can sign new ones at higher market rates.
Rents will likely continue rising, given the currently low vacancy rates and the lag between new supply and demand. Overall, the U.S. industrial market needs a lot more space to meet projected future demand.
According to JLL, a trio of tailwinds -- e-commerce, inventory increases, and a resurgence in U.S. manufacturing -- will drive demand for an additional 1 billion square feet of industrial real estate by 2025. While the sector's current construction pipeline will satisfy more than half of this need, the industry will need to find suitable locations to continue building, which is becoming more challenging.
The building boom appears poised to continue
The industrial real estate market is in one of its strongest periods on record. While construction is booming, developers still can't keep up with demand. Because of that, vacancy levels are at record lows, while rental rates are rising fast. The sector's tailwinds aren't likely to fade anytime soon, suggesting that industrial real estate will remain strong for quite some time.