US industrial absorption is outpacing new supply deliveries this year, according to Colliers International. US industrial inventory increased by 2.4% in 2020, while national absorption increased 3.3%.
The report analyzed activity in the top 25 US industrial markets. Inventory levels increased in all markets, some significantly. San Francisco was the only market with limited new deliveries, with inventory increasing by less that 1%. Washington DC and New York also had limited new supply deliveries, but all three of these markets have limited developable land for new construction.
Instead, emerging markets took the spotlight on new industrial construction at the end of the year. Dallas-Fort-Worth, Indianapolis, Houston, Columbus and Phoenix were at the top of the list new deliveries this year, with supply increasing by at least 3% in each market, and Indianapolis recorded the largest quarter-over-quarter change with inventory increasing 1.8%. In the third quarter, 5.1 million square feet of new industrial product delivered in Indianapolis alone. The new deliveries included Hendricks Gateway Park in Monrovia, a 1.1 millions square foot spec facility.
Overall, this activity is likely to be record setting. This year, industrial inventory increased by 252 million square feet nationally, a 27% increase over 2019. Ecommerce demand was the primary driver of the activity, with Amazon accounting for two of the five largest deliveries in the third quarter.
Despite the new supply, construction is not yet outpacing absorption in most markets. US industrial absorption has increased 3.3% this year, but those gains were led by activity in the top 11 US markets. The remaining nine markets—including South Florida, Chicago, Charlotte, the San Francisco Bay Area and the Greater Los Angeles Area—recorded occupancy losses due to diminished demand during the pandemic, according to the Colliers report. However, only two markets had negative absorption in the third quarter, South Florida and the San Francisco Bay. The R&D sector in Silicon Valley led 1.9 million square feet in occupancy losses. Milwaukee, Cleveland, Seattle and Tampa Bay were the top markets for industrial absorption, each recording 50% or more increase in occupancy gains.
Next year, this perfect supply-demand balance could be thrown off course. A report from Cushman & Wakefield anticipates vacancy rates will increase by 100 basis points over the next two years, closing 2022 at 6.2%. The construction pipeline continues to grow, with nearly 700 million square feet set to deliver in the next two years. New supply isn’t necessarily bad news for an asset class that is known for being supply constrained. C&W says that the increase in inventory will alleviate some of the pressure on supply-constrained markets throughout North America.
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