JLL research cites benefits of e-commerce in driving U.S. industrial real estate market to new highs

Chicago-based industrial real estate firm JLL said in its First Look at Industrial report for the third quarter of 2017 that market indicators continue to see significant increases.

One example of this is for rent, which JLL said are being paced by a combination of an increase in warehouse and logistics absorption and “persistently low” market vacancy. Third quarter rents checked in at $5.40 per square foot, which JLL said is an all-time high.

What’s more, compared to the third quarter of 2016, rents are up 5.3%, with almost 79% of U.S. markets currently experiencing some sort of rate growth. The markets seeing the biggest growth in rents over the third quarter were Northern California and New Jersey, which each saw double-digit annual rent gains.

Third quarter vacancy rates checked in at 5.2% in the third quarter, which JLL described as steady, adding that strong leasing fundamentals are likely to lead to new completions and net absorption each on target to top 200 million square-feet, respectively. The current amount of absorption through the third quarter stands at roughly 165.6 million square-feet, with new industrial product square-feet at 161 million, which JLL said represents a clear sign of demand continuing to outpace new supply.

Helping to lead the way for these impressive figures, said JLL, is the need for more space for e-commerce players, with the firm explaining that e-commerce now accounts for almost 25% of total U.S. leasing demand, with e-commerce companies expanding their footprints in places where they already were established.

JLL Vice President, Americas Industrial Research, Mehtab Randhawa said that this data reflects how all U.S. markets have strong fundamentals, as evidenced by the highest-ever rent at $5.40 per square-foot and the U.S. vacancy rate of 5.2%, as well as the strong absorption numbers for the quarter.

“These strong fundamentals are something we have been seeing quarter-over-quarter for nearly the last five years,” said Randhawa. “It really has been a storyline that does not seem to be stopping anytime soon.

Addressing the impact of the e-commerce sector on U.S. leasing demand, Randhawa echoed the report’s commentary in that it really speaks to expansion requirements by leading e-commerce players, especially when compared to other sectors.

“What we have seen in the past few years is that e-commerce companies have been gradually expanding their presence across all of the different industrial markets in the U.S.,” she said. “And now that they have planted a flag in the most critical population centers, we are seeing them expand their presence in this cycle within those markets. We looked at leasing activity from a pure expansion perspective this quarter for many sectors and saw that e-commerce retailers were expanding their footprints by leaps and bounds compared to other sectors.”

JLL’s research raised the question of if rising rents and low vacancy could lead to a potential shutdown in leasing activity.

And it answered its own question, saying that will not occur in the short term, as in recent years there has been a focus on supply chain productivity that has spurred growth in what it called “hot sectors” like e-commerce, third-party logistics, and logistics and distribution, which is leading to increasing demand for new, modern industrial space.

“The market has been operating at such a low vacancy rate for such an extended period of time throughout this expansionary cycle,” said Aaron Ahlburn, JLL Managing Director, Global Industrial Research. “We continue to see strong leasing activity in those verticals working with tenants active in those markets right now, and we expect that to continue going forward in the coming quarters.”

Looking at rents on a historical basis, as it relates to the current cycle, based on JLL data, rents have seen 22 quarters of consecutive rental rate growth. And from 2010 to present day JLL has seen consistent declines in the vacancy rate.