CBRE 2020 U.S. industrial and logistics real estate outlook is solid with some shifts

In its recently-issued “U.S. Outlook for 2020,” Los Angeles-based industrial real estate firm CBRE pointed to some significant, shifts that are likely to be in store in the U.S.-based industrial & logistics (I&L) market.

One of the key takeaways identified by CBRE was that absorption gains are expected to be limited in 2020, with available supply expected to outpace demand by 20 million-to-30 million square-feet, or 0.2% of total industrial inventory, for the first time since the 2008 recession, while rent growth is pegged to head up by 5% and the vacancy rate, which it say may see a slight rise, is expected to remain near historic lows next year.

“Despite some softening in the industrial & logistics (I&L) market, overall fundamentals will remain strong due to continued e-commerce penetration and demand for logistics space,” CBRE wrote. “Rent growth will be driven by newly constructed facilities and infill properties. Although there are trade-related risks, resilient consumer spending will buoy the I&L market and mitigate any tariff effects on major hubs relying on port activity.”

The expected significant shifts in the 2020 U.S. industrial market cited by CBRE include how absorption gains will be difficult to achieve with extremely low vacancy rates and limited space options in several markets, which will lead to lower net absorption than in previous years. And on an anecdotal basis, CBRE noted that there are currently higher-than-normal renewal rates, especially in markets with the lowest vacancy rates, which continue, if not accelerate, in the neat term.

“[T]he market will remain stable as e-commerce penetration continues to impact supply chains,” it said. “As operations become more complex for occupiers, there will be a heightened focus for outsourcing, paving the way for growth in the third-party logistics sector.”

As for the expected rent gains, CBRE said they will be paced by new product and infill industrial space in supply-constrained markets, adding that high-quality, first-generation Class A warehouse space typically generating a rent premium and demand for light-industrial warehouses less than 120,000 square-feet will grow, due to e-commerce players endeavoring to offer same-day customer delivery.

CBRE said that rents for light-industrial warehouses have gone up 30% over the past five years, with big-box rents up 15% over the same period, with rent growth for that space expected to remain intact over the next year, as space remains tight.

In an interview, Matt Walaszek CBRE's Associate Director of Industrial & Logistics Research, said that while supply is catching up with demand for the first time in this cycle, it is not a concern and could actually be viewed as a good thing.

“The market is not going to be as tight as it has been,” he said. “That said, there are still extremely low vacancy rates in markets like Los Angeles, where there are virtually no vacancies. But not all markets are created equal. In some of the Midwest markets, there is softening with supply outpacing demand. We do see demand remaining strong going forward…and will drive further rent growth.”

Rent growth will be driven by two different factors, he said.

The first one has to do with the delivery of new product, which commands a higher rental rate, and second is the growth in last-mile and light-industrial facilities and commands a higher premium, in terms of rent and drive it going forward. The expected 5% rent growth estimate is consistent with previous years, at a slightly lower level, he said, while still remaining strong.

When asked what factors are behind the higher-than-normal renewal rates especially in markets with the lowest vacancy rates, Walaszek said that pertains to markets where there are limited space options, with conditions still tight in several markets. In those markets, CBRE is seeing higher-than-average renewal rates, in which industrial occupiers are renewing their space, as opposed to relocating or expanding their footprint.

“It is a trend that has emerged in the past few years, and we expect it to continue in 2020,” he said. “We are definitely seeing it anecdotally and hearing it from our brokers…and expect the vacancy rate to remain below 5%, which will drive more renewals.”

Some of tightest U.S. markets at the moment, according to Walaszek, are northern New Jersey, Chicago, as well as secondary markets like Detroit and Indianapolis, the Inland Empire, and Miami, among others.

Addressing the report's finding regarding supply expected to outpace demand in 2020, Walaszek said it can be narrowed down to a small handful of sub-markets, including Joliet, Ill., north Atlanta, and parts of Dallas, where there is a lot of market availability and a lot of projects under construction and coming online.

“If you look at the overall U.S. market, there is not a huge imbalance,” he said. “But there is some softness in particular submarkets. There is no cause for concern overall. More supply is a good thing, as it creates more options for occupiers.

The continued elevated demand for light-industrial warehouses less than 120,000 square-feet will remain intact going forward, due, in large part, to immense demand for last-mile logistics services, from e-commerce companies and others.

“The challenge is that there is limited availability in that segment, and it will be a challenge going forward and will drive rents up for those facilities,” he said. “There will be continued robust demand in that segment, especially as delivery times get condensed further, with consumers accustomed to next-day, same-day, or even next-hour delivery,” he said. “It is definitely going to push more demand for light-industrial close to population clusters in metro regions all over the U.S.”

SC
MR