U.S. Industrial Overview – Year End 2018
James Breeze, National Director of Industrial Research
By James Breeze
U.S. Industrial Posts Second Best Year on Record
- The U.S. industrial market finished 2018 with 276 MSF of overall net absorption, the second highest rate on record.
- Overall vacancy rates remained low at 5.0%despite another year of robust new development, which finished 2018 at 263 MSF completed.
- The Inland Empire dominated 2018 with 25.4 MSF of net absorption. The region also led the nation in new construction at 26.5 MSF.
- Direct asking rents continue to increase finishing at an alltime high of $5.75 psf/yr for W/D space.
Core Markets Dominate Leading to Robust Fundamentals
U.S. Industrial Markets Existing Inventory
U.S. Industrial Overall Vacancy Rate Breakdown Q4 2018
U.S. Top 10 Rankings 2018
Occupier Demand Driven by 3PL and E-Commerce
- While e-commerce continues to get all the press, the top occupier of industrial space remains third-party logistics and packaging companies (3PLs) who signed nearly 115 million square feet of industrial deals the past 12 months, 31% of the total transactions signed.
- While E-Commerce only occupiers signed 11.4% of the new deals in 2018, they required the largest buildings as the average e-commerce transaction the past year totaled 496,000 square feet, nearly double the overall average transaction size for a bulk industrial building.
- Manufacturing occupiers continue to expand within the U.S. and have the potential to be one of the top growing industrial occupier types if trade issues are settled in the coming quarters.
Top 10 Occupiers of Space in the U.S. in 2018
E-Commerce Forcing Occupiers to Expand and
Modernize Supply Chain
- U.S. e-commerce sales rose an impressive 14.5% in Q3 2018 compared with the same time last year and now represent 11.1% of non-auto total retail sales.
- The continued surge in online sales and the need to get products to consumers quickly while minimizing supply chain costs are forcing retailers and wholesalers into more facilities throughout the country and rapidly changing supply chain strategy.
- These changes will be a major contributor to industrial real estate demand for the foreseeable future.
Overall Net Absorption Positive for 35th Consecutive Quarter
Asking Rents Reach All-Time Highs But Remain A Small Portion of Overall Costs
Warehouse/Distribution Development Booming Because of Occupier Requirements
Since 2010, a whopping 1.2 billion square feet of warehouse product has been completed across the U.S. The top reason for this massive amount of development is the changes in supply chain because of e-commerce. Occupiers require different functionalities than many buildings completed before 2010 possess.
U.S. Industrial Sales Activity Overview
- The industrial sector was firing on all cylinders in 2018. $92.4 billion worth of transactions were completed, over 70
MSF of which was in Warehouse/Distribution facilities, an all-time record high. Sales prices also continue to rise with
average price psf up 7.9% from a year ago.
- Despite the turmoil in the financial markets, cap rates were largely unchanged-to-flat from a year earlier in Q4’18. Cap
rates for flex assets averaged 6.7% in Q4’18 and a year earlier. Warehouse cap rates fell 20 bps over the last year
though, to hit 6.3% in Q4’18.
- There are warehouse assets in the market today trading at cap rate levels like those seen for office towers in
Manhattan. Large distribution facilities with Amazon as a tenant have traded in the 4%-5% cap rate range. Larger
buildings are also producing lower cap rates with buildings over 500,000 square feet selling at an average cap of 5.8%
- Looking ahead, investors will continue to focus on secondary and tertiary markets because of easier opportunities of
entry compared with core markets. Markets with large quantities of urban warehousing with high rents and low
vacancies, including Seattle, Washington D.C., the NY Boroughs, Los Angeles and South Florida, will also enjoy
increased owner interest, especially in “opportunity zone” designated areas.
U.S. Industrial Sales Activity Overview – Total Warehouse/Distribution Volume
U.S. Warehouse/Distribution Sales Activity Overview – Cap Rates and Avg $/sf
E-Commerce and a Solid U.S. Economy will Drive Demand
- Industrial real estate will continue to prosper in 2019 with robust development, as well as strong
positive absorption, and continued record low vacancy rates and record high asking rental rates.
- Demand from 3PL’s and E‐Commerce occupiers will remain high, however we will see the biggest
increases in new transactions from Manufacturers and the Food and Beverage industry.
- Occupiers and investors will focus expansion on markets with high population concentrations,
availability of labor, close proximity to major rail hubs, air cargo ports, seaports, and markets with
economical rents and pro‐business environments.
- Look for markets including St. Louis, Minneapolis, Savannah, Greenville, Las Vegas, Shenandoah Valley,
Sacramento, the I‐4 Corridor, Seattle and the Lehigh Valley to experience the largest growth in activity
and investor demand in the coming quarters.
- Headwinds to look out for: Weakening Global Economy, Declining Home Sales in U.S., Labor Shortages,
Disruptions to Global Trade.
- Increasing Consumer Expectation for Speed
- Lack of Qualified Labor
- Gig Economy
- Threat of Amazon
- Transportation Changes
- Automated Vehicles/ Trucks
- How to Control the Cost of the Last Mile
Greater focus on creative industrial
Bigger Hubs & smaller/closer last mile
Occupiers and Owners are Trying to Solve the Final-Mile
- As consumers increasingly expect that their e‐commerce orders are fulfilled and delivered in two days or less,
demand for closer “in‐town” smaller final‐mile fulfillment centers is exploding.
- It is this segment of the supply chain – getting the order to the end consumer – that overwhelmingly is the most
expensive portion of the total transportation costs.
- Final‐mile distribution centers tend to be near highly‐populated areas to access as many customers as possible.
This is the primary value of the site.
- In many populous areas however, industrial markets are mature and provide relatively few options for
distribution needs. This is forcing occupiers to get more creative, and use more in‐depth location analysis than
- In many markets, functionally obsolete industrial or converted retail space is being absorbed because of the
ability to quickly reach end users is more important than building amenities when it comes to the final‐mile.
Occupiers and Owners are Trying to Solve the Final-Mile (cont.)
- Use mapping, supply chain, national research, and marketing resources to analyze the final-mile.
- The final-mile can be different in every market, there is no set answer.
- We are starting a series of final-mile reports that will eventually encompass most major markets.
- Los Angeles Basin and New Jersey Corridor Final-Mile Reports were released in 2018 and plans are in the works for other major metro reports in 2019.
The Availability of Labor will be Integral to Site Selection
- With the U.S. economy near full employment and the industrial market needing more workers due to ecommerce, intensifying warehouse demand, and many occupiers are having difficulty finding adequate labor.
- This trend could have a negative effect on markets with a shortage of industrial labor and could be a boon to markets with an adequate trained labor force in the coming quarters.
- While the availability of labor will gain in importance in industrial site selection, look for the use of automation and other technologies to increase as a way of combating labor shortages throughout the country.
Tariffs Could Impact Markets Differently Based on Geography
The U.S. industrial market is heavily reliant on international trade. Because of this, tariffs on imports and counter tariffs on exports could lower demand for industrial real estate.
Tariffs could affect markets differently based on its proximity to ports and types on products stored. NAFTA, China, and Europe could all have more affects than others.
Many tariffs are currently affecting raw materials or finished materials that are not major occupiers or industrial products, but this could change, especially if tariffs are increased to 25%.
COLLIERS U.S. INDUSTRIAL RESEARCH REPORTS COMING SOON
- 10 Emerging Markets to Watch in 2019 (February)
- U.S. 2018 Year-End Report and Outlook (March)
- North America Big-Box Report and Outlook (March)
- Planning the Final-Mile – Chicago (April)
- U.S. Seaport Outlook (May)
- Blogs on Opportunity Zones, Labor, External Indicators and Market of the Month Profiles