Podcast
The Market Update

Economy

Fragile Recovery Not Holding Back Industrial & Logistics


Initial unemployment claims continue to fall, suggesting the U.S. economic recovery remains on track to produce strong GDP growth in Q3. Yet a sense of fragility is emerging. Consumer confidence dropped to a six-year low in August. The failure by Congress so far to agree on a new and much-needed stimulus package is one part of the problem. The increasing possibility that corporate America will start to retrench, cutting well-paid middle-class jobs, is another.

There are some notable strengths, however. Existing home sales have returned to a level not seen since the peak of the 2006 housing boom. A ramp-up in construction will surely follow. Retail sales are already above their pre-COVID level and likely will be boosted further by the buoyant housing market. Durable-goods orders rose by 11.2% in July—the third consecutive monthly gain. The Fed’s decision this week to go easy on inflation in the coming years is a very welcome policy development as well. These factors are highly positive for industrial & logistics real estate. And with e-commerce’s share of total retail sales growing by 16% to 20% over the past six months—as much as in the past four years—the I&L sector is poised to further withstand the crisis.



Spotlight on Industrial & Logistics

More Warehouse/
Distribution Space Needed


The U.S. industrial & logistics market posted its 41st consecutive quarter of positive absorption in Q2 2020, with record-high asking rents and an overall vacancy rate of 4.7%—just 40 basis points higher than the all-time low. Transaction levels suggest net absorption will remain positive throughout this economic downturn, unlike the Global Financial Crisis when there were six consecutive quarters of negative net absorption. Approximately 314 million sq. ft. of new industrial space is under construction nationwide, 37% of it preleased. Urban land sites for industrial development are scarce, leading developers to get creative by converting vacant retail sites to distribution facilities. As of July, there were 59 of these conversion projects either completed or underway.

E-commerce growth and higher inventories onshore will require more than 2 billion sq. ft. of additional warehouse/distribution space over the next decade. Because of import tariffs and COVID-related slowdowns, many companies are adopting a “China-Plus-One” supply chain strategy—sourcing goods from other lower-cost export countries. While this shift will affect site selection, it is the volume of consumption that will dictate demand for industrial real estate.

Atlanta

Overall leasing volume in the first half of 2020 totaled 28.1 million sq. ft., a year-over-year increase of more than 50%. Five leases of more than 1 million sq. ft. have been signed since January, setting a record.

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Chicago

Performance of Chicago’s 1.3 billion-sq.-ft. industrial market is strong and steady. Vacancy ticked up in the first two months of Q3 but remained below equilibrium at 3.8%. Both tenants and owners are adapting quickly to the impact of COVID-19.

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Dallas/Ft. Worth

Like other super-regional distribution markets, Dallas/Ft. Worth is seeing increased demand for warehouse/distribution space. Many suppliers to both brick-and-mortar and e-commerce retailers are faced with new requirements to store more goods closer to consumers.

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Inland Empire, CA

Inland Empire has recorded a substantial amount of net absorption so far this year, maintaining a vacancy rate of 3.3% despite more than 8 million sq. ft. of new deliveries.

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New Jersey/ Pennsylvania

Overall regional leasing activity has declined slightly this year, although there was a surge in Q2 driven by strong demand from traditional retailers, e-commerce companies and third-party logistics providers, whose businesses have grown significantly amid the pandemic.

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Europe

Europe’s logistics market is experiencing strong tailwinds from the boost in e-commerce as a result of the pandemic. The struggles of brick-and-mortar retailers and the manufacturing sector, coupled with global trade disruptions, have been counterbalanced by accelerated e-commerce demand.

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