U.S. Industrial Market Firing on all Cylinders Heading into 2018

The industrial market completed its second-best year on record in 2017, with every key indicator at or near all-time highs. E-commerce has the industrial real estate market firing on all cylinders, creating robust demand for big-box buildings, last-mile distribution centers, industrial flex space and manufacturing facilities. 

Looking forward, the industrial sector could gain from both the recently-enacted U.S. tax bill and an improving global economy. However, labor constraints and uncertainty over the direction and impact of trade policies could ultimately prove to be a headwind for the sector.  

KEY TAKEAWAYS

  • At year-end 2017, only 5.1% of the nation’s industrial space was vacant—the lowest rate on record despite 243 million square feet of new supply being completed in 2017.
  • The nation’s manufacturers continue to increase output and companies continue to relocate operations back to the U.S.
  • E-commerce sales grew 16% in Q3 2017 (the most recent data available) compared with Q3 2016, and now represent 10.1% of total non-auto retail sales. E-commerce sales growth will continue to be the driving force for industrial real estate in 2018.
  • Warehouse space, especially in urban locations with young populations, will continue to attract top interest for both investors and occupiers in 2018.
  • Tightening markets and new, higher-quality Class A space drove up average asking rents to $6.29 per square foot per year in Q4 2017, 7.5% higher than the previous year. With vacancy rates expected to remain low because of continued strong demand, asking rental rates will continue in an upward trajectory this year.
  • More than $72 billion in industrial assets changed hands in 2017, among the highest annual totals ever. Transactions were up 20% compared with the previous year and industrial assets were the only major property type to produce year-over-year gains.
  • While most signs point to continued strong fundamentals in 2018, headwinds to look out for in 2018 include a growing shortage of available labor in many U.S. industrial markets. Also, trade policies should be watched, especially with NAFTA’s future at risk, and tariffs increasing on some imported goods.