CBRE research makes the case for continued U.S. industrial real estate growth in 2018

When sizing up the state of the industrial real estate market, which has been moving in the right direction for an extended period and spurred on in large due to e-commerce activity, the sector’s future continues to look bright in 2018, according to research issued today by industrial real estate firm CBRE.

In its 2018 U.S. Real Estate Market Outlook, CBRE highlighted myriad factors that support its thesis for continued U.S. industrial real estate growth.

Looking at net absorption, which CBRE views as a “proxy for demand,” the average quarterly net absorption 2017 was 52.9 million square-feet, which CBRE said was down from an above average run from 2013-2016, but consistent with the quarterly average over the cycle that kicked off in 2010.

“Consistent demand for all types of warehouse space, steadily declining availability and a steady rise in rates have been this cycle’s hallmarks, resulting in some impressive milestones,” CBRE said in its outlook, adding that there have been “30 consecutive quarters of positive net absorption availability at its lowest since 2001, and 24 consecutive quarters of rent growth.”

With pricing at what CBRE said were “record highs across the board,” for both users and occupiers, it noted that over the course of the next year, new market entrants can expect rates to continue to head up at around the same rate it has seen in recent years.    

“My chief feeling is that there is not a lot of reason to think much is going to change in 2018 from 2017,” said David Egan, CBRE’s Global Head of Industrial & Logistics Research, in an interview. “The net absorption figure declined from 2016 to 2017 and is likely to do so again from 2017 to 2018 as well at about the same level. There is a difference between demand leaving the market and tenants not looking for space anymore, which is one story. And the other story is tenants are still in the market looking for space but they are not finding much as there is such little space available. As a result, deals are not getting done as quickly as they have been.”

With net absorption serving as a measure of the reduction in vacant space, Egan explained that what CBRE is seeing now in several markets is that tenants are not looking for space. Instead, what they are doing is swapping space, as there are rising rents and increased competition for spaces, as opposed to a reduction in vacant space.

“Demand has not left the market,” he said. “Even though vacancy rates might pick up a little bit, due to some construction growth and rental rates remaining strong, it is not an indication of demand leaving the market. There is tons of activity in the market, and users are really active. I expect this year to be good. It is incredible how many people are looking for space. There are lots of request for additional space from users.”

From a supply chain and freight transportation perspective, CBRE’s research pointed out how with tight market conditions comes a lack of quality choices in many markets that has put users looking to expand their supply chains in a difficult spot.    

What’s more, it explained how while record-level rents remain a concern, compromises tenants make on location decisions, at the market or submarket level, are an issue, with these decisions having a major impact on overall supply chain costs that are heavily influenced by inbound and outbound transportation and labor costs.

“That is a major issue right now,” said Egan. “Users in this space have become extremely sophisticated. And the way in which inventory and [other] aspects of the supply chain are handled are different compared to ten years ago, with more pressure on costs and delivery and service promises. There is more transportation happening, leading to users understanding the importance of location on their overall cost structure…and what the right location is. Right now, there is not a lot of space left.”