Despite Uptick in Completions, Construction Delays Continue

Strong retail sales, continued e-commerce expansion and the need to keep more “safety stock” inventory amid supply chain volatility are causing fierce demand for warehouse space. Net absorption has been positive for the past 46 quarters, driving the overall industrial vacancy rate down to a historic-low 3.6%, with some markets experiencing extremely limited space options.

Developers are attempting to keep pace with rising demand, with a record-high 432.6 million sq. ft. under construction as of Q3. While completions are down by 6.1% year-to-date through Q3 compared with last year, they increased by 36.1% between Q2 and Q3 to 79.3 million sq. ft.

Delayed projects rose to 213 in Q2 before plummeting to just 31 in Q3, indicating that developers are willing to accept rising construction materials costs amid supply chain disruptions.

Figure 1: Under Construction, Completions and Number of Deferred Projects

Note: Deferred projects as of August 2021.
Source: CBRE Research, CBRE EA Supply Track, Q3 2021.

Sourcing delays for items such as roof fasteners, dock door rollers, insulation and many others have made it difficult for developers to stay on schedule, especially in large markets with robust development pipelines. With leasing activity at a record clip—up by 48.4% year-over-year in August—new supply may continue to lag demand for some time given the challenging construction environment.

Materials costs are still well above pre-pandemic levels; however, lumber prices have dropped significantly since June. Iron and steel prices, which skyrocketed earlier this year, are leveling off. Rising rents—up by 10.4% overall since last year—are offsetting some of these increased costs.

Figure 2: Construction Material Cost Index

Note: Index 2000=100, Not Seasonally Adjusted.
Source: St. Louis FRED, CBRE Research, August 2021.

Figure 3: Construction Material Lead Times and Availability

Source: Turner Construction, CBRE Research, Q2 2021.