The industrial sector kicked off the year with surging demand outpacing supply for the first time since the first quarter of 2019 and record-high rents hovering at $6.90 per square foot nationally, according to a new report by Cushman & Wakefield.
The first quarter of 2021 showed market absorption of 82.3 million square feet (msf), the most space ever absorbed in a first quarter of any year reported by Cushman & Wakefield and a number that’s up 78.2% over the 46.2 msf reported in the same period last year. Warehouse and distribution space was the strongest secondary property type with 77.9 msf of net absorption, according to C&W data, with manufacturing and high-tech space also ending the quarter strong.
Positive absorption was noted in 62 of the 81 markets tracked by the firm, and 23 markets posted more than 1 million square feet of positive net absorption. Of those, the Inland Empire, Houston, Atlanta, Dallas/Fort Worth, Chicago, Central New Jersey, Milwaukee, Detroit, Phoenix and Columbus accounted for 56.4% of all new completions.
Demand also remained strong, with new leasing activity surpassing 100 msf for the 21st consecutive quarter and clocking in at 193.8 msf, a slight uptick from last quarter’s record high of 194.2 msf. About 87% of all new leasing activity across all industrial product types was centered in the logistics space.
“This level of demand is putting the market on pace to see another year of new leasing activity surpassing 600 msf by year-end, which happened for the first time ever in 2020,” the report notes. “Among the key drivers stimulating robust demand are digital sales, sparking more e-commerce leasing, as well as third-party logistics providers that occupy warehouse/distribution space.”
Until the first quarter of 2021, supply had steadily outpaced overall demand for two years, but Q1 saw that flip, with demand surpassing supply by more than 15.8 msf, which rebalanced the market and drove vacancy down.
Cushman & Wakefield analysts predict solid demand for industrial space will continue in 2021, with net absorption predicted to again surpass 200 msf in 2021 and annual new supply outpacing annual demand.
In particular, “industrial supply is likely to produce around 30% more space than can be absorbed, bringing quality space to the market for occupiers to consider,” the report notes. “New supply will place upward pressure on overall vacancy in the next couple of quarters with the rate rising 30-to-50 bps to between 5.2% and 5.4%.”
The firm also predicts asking rents will continue to increase year-over-year, “but new supply and more modest demand will be headwinds that moderate the pace of overall rent growth for the year,” according to the report.
Industrial was CRE’s best-performing asset class in 2020, according to Moody’s Analytics, with 40 straight quarters of positive net absorption reported at year’s end, thanks largely to a dramatic uptick in e-commerce sales and fulfillment. Moody’s predicts that as vacancy rates decline steadily over the next five years, effective rents will rise by 1.4% in 2022.