MID-YEAR 2020 INDUSTRIAL MARKET UPDATE
Net Absorption & Vacancy Rates
Statistically, Q2 2020 is showing the effects of COVID-19 on industrial leasing activity and the industrial market. Net absorption of vacant space during Q2 2020 was only 107,345 SF compared to 829,298 SF for Q2 2019. YTD net absorption for 2020 totals 330,369 SF compared to 1,587,669 SF in 2019.
The difference in the net absorption numbers (SF) between 2019 and 2020 is significant. However, the industrial market remains healthy as demonstrated by the overall industrial vacancy rate of 5.0% through the Q2 2019 and 4.8% through Q2 2020. More specifically, YTD industrial vacancy rates reflect the continued sound condition of the market by product type:
What is Influencing this Market Condition?
Two characteristics of the current market have significantly influenced the ongoing strong conditions of the industrial market: 1) Vacancy rates were at historical lows prior to the introduction of COVID-19 and, 2) Delivery of new industrial product to the market year-over-year has moderated. YTD Q2 2019 deliveries of new industrial product totaled 1,853,203 SF. While Q2 2020 new deliveries of industrial product totaled only 906,571 SF. The combination of less new development coming on line and limited negative absorption has enabled vacancy rates to remain low. Therefore, the overall market is in a state of good health.
Current expectations between landlords and tenants do seem to significantly differ. Tenants believe the industrial market has weakened and landlords are still very bullish on the market. A major reason for this difference in perception of the market has been the media’s reporting on the commercial real estate market. Retail and office space have been significantly impacted by COVID-19, so far in 2020. COVID-19 has had a very limited impact on new industrial lease terms and conditions, at least through Q2 2020. Limited net free rent, and tenant improvement packages, combined with strong net rates seems to be the story of the day for most industrial properties. The one exception to these healthy characteristics is office/flex/showroom product. Office/flex/showroom product still requires net free rent and significant improvement dollars generally to consume a new lease.
Hottest Industrial Market Segment
One of the brightest spots in the industrial market is User/Owner building sales. The limited supply of functional industrial properties currently available For Sale, combined with the low interest rate environment for debt, has pushed User/Owner building values to all time highs. Specifically, well-located properties receive multiple offers in many instances.
What is to Come
Finally, finding a vaccine that will make the current pandemic a thing of the past will remove much of the uncertainty existing today in the economy and the commercial/industrial real estate market. If the pandemic continues on into next year, the statistics and resulting story being told may be much different than it is today.
Written by: Phil Simonet, Principal