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  September 19th, 2016 | Written by

Supply Chain is Driving Industrial Real Estate Demand

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  • Supply-chain modernization is driving demand for distribution space.
  • Job growth and recovery in housing markets lead to increased consumer spending and confidence.
  • Ecommerce sales are outperforming overall retail sales.

The U.S. industrial real estate market continued its positive run during the first half of 2016. In the second quarter the market saw the lowest vacancy rates and the highest levels of net absorption, new supply, product under construction, and asking rents ever recorded.

Those were some of the key observations included in a recent report from Colliers International, industrial real estate specialists.

“Supply-chain modernization and positive economic fundamentals continue to drive demand,” noted the report, which was authored by James Breeze, U.S. national director of industrial research at Colliers. “The bulk of activity remains concentrated in core industrial markets but is also growing in other coastal and inland port locations.”

Ecommerce is shifting how retailers and wholesalers deal with distribution and accounts for much of the current indsutrial real estate activity. The report projects that low vacancies low, high absorption levels, and robust new development will persist into 2017.

Although U.S. GPD growth has been less than impressive for the first half of 2016, other economic fundamentals paint a different picture. Consumer spending in the second quarter showed an annualized growth rate of 4.2 percent—the highest in a couple of years. Accelerating job growth and continued recovery in housing markets lead to increased consumer spending and confidence, according to the report.

Ecommerce sales are outperforming overall retail sales. “Online sales grew 15 percent in Q1 compared with the same time a year ago,” the report noted, “five times higher than the three percent overall retail growth for the same time period. These sales generated far more demand for industrial space than

equivalent sales in brick-and-mortar stores, as merchants shift more goods into warehouses rather than into stores.”

Vacancy rates for industrial space declined versus mid-year 2015 in 84 percent of U.S. markets. At the end of June, six percent of the U.S. industrial space was vacant, “the lowest rate on record,” said the report. Vacancies dropped despite a record 63 million square feet of new supply which was completed in the second quarter.

“Development will not ease any time soon,” the report predicted, “with a record 204 million square feet now under construction.”

Strong leasing and lower vacancies drove up rents in the second quarter to $5.66 per square foot per year, “an all-time record for the country (not adjusted for inflation),” the report said. Asking rents for distribution space increased year over year in 87 percent of the U.S. markets that Colliers tracks.