By Brian Banaszynski
Typically, the United States has had a recession every decade since 1850, but we’re at the 10-year expansion mark and the economy still appears steady. This stability is due to a number of factors, but supply and demand in the industrial real estate market is a factor that’s worth examining closer. There are several issues developers should watch to consider their potential effect on supply and demand at this point in the cycle.
Growing Demand, Limited Supply
The red-hot industrial real estate sector, which many are calling “recession proof,” continues to post record-low vacancy rates. In the Northeast corridor, industrial space is being snapped up as soon as it hits the market, and supply is not keeping up with the insatiable demand.
There are many factors inhibiting the supply of new industrial development, including land constraints, rezoning, time, cost, traffic conditions and environmental challenges. Also, new requirements, such as more parking for increasing truck, trailer, and auto needs, is limiting the amount of space being added to supply. This is reducing the size of buildings delivered, and it sometimes requires the use of an additional site in lieu of another building.
While these factors can pose a problem to industrial real estate development, they are also protecting the sector from overbuilding. Currently, there is not a concern of oversupply, which is something that would usually be expected at this phase of the cycle. If supply overshoots demand, there will likely be a rise in vacancy, which is balanced right now. In fact, all new industrial real estate product that has been built recently is being leased, with 70% of it being spoken for while still under construction.
Another factor that is impacting industrial real estate development is e-commerce, which has created reverse logistics, or the need for separate facilities to handle returns. E-commerce as a percentage of overall U.S. retail sales surpassed 11% for the first time during third quarter 2019 and has reached a 16.9% increase from a year ago – the highest year-over-year increase since first quarter 2012. Additionally, e-commerce as a percentage of overall U.S. retail sales climbed during the previous recessions (since 1999, when e-commerce became relevant), a further example that the industrial real estate market will likely survive an economic downturn.
Interest rates have also been top-of-mind for commercial real estate companies. Many believe that if the Federal Reserve raises interest rates, it could mean a drop in commercial real estate values. Fortunately, increasing interest rates won’t likely slow anything down for industrial real estate as the pent-up demand and adequate supply will keep the industry steady.
As we surpass this 10-year mark, it’s encouraging to see the industrial real estate sector remaining strong, evidenced by more than 400 million square feet of industrial space under construction nationwide. Due to unprecedented demand, that figure grew steadily throughout the 2010-2019 decade. Looking ahead to the rest of 2020, impending market changes and other factors aren’t expected to have a significant impact on absorption because of the balance of supply and demand.
Brian Banaszynski leads industrial development in the Northeastern U.S. for Transwestern Development Co. In this role he has senior responsibility over sourcing and executing institutional logistics projects with a primary emphasis on New Jersey, Pennsylvania and New York.