U.S. Industrial Space Vacancy at Record Low 2.9%

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The domestic market for industrial space, including retail and ecommerce distribution and fulfillment centers, won’t see relief in terms of an appreciable jump in new facilities available to help meet high demand until the first half of 2023, as the busy holiday peak season approaches.

According to CBRE’s second quarter report, there is a record 626 million square feet of industrial space under construction, at a record low overall vacancy rate of 2.9%, down from 3.4% in the prior quarter and 3.6% a year ago. The amounts landlords are asking for commercial rents are up 14.9%, while actual “taking” rates from signed leases rose 18% from the prior year as demand continues to outstrip supply.

The net absorption rate of new industrial space was down 48% in Q2 from the prior year, to 78.5 million square feet, but still in positive territory for the 49th consecutive quarter.

Retail and wholesale are the second-largest occupiers of industrial and commercial buildings in the U.S., according to CBRE, at 27.4% of the total available space, up from 24% in in 2021. The largest occupier is third-party logistics providers, at 35.9%, up from 30.1% a year ago as more retailers look to outsource their operations. Ecommerce pure-play companies represent 6.4% of the total, relatively unchanged from 2021 as the space has cooled somewhat.

Acting as a headwind against new space availability are the long lead times for building materials caused by global supply chains that remain stretched thin, driver shortage issues and lower manufacturing production. For instance, CBRE found the average lead time for roofing insulation was more than 40 weeks, while HVAC equipment was at over 36 weeks and wood doors and frame more than 18 weeks.

James Breeze, a senior director and global head of industrial and logistics research at CBRE, said there is an overall 5x-6x increase in lead times for building materials from two years ago. “That’s a major reason why construction is lower than it needs to be to keep up with demand,” Breeze said. “We have a record of square feet under construction, but some has to do with (supplies being unavailable), creating a backlog.”

Breeze said expect rents for industrial space continue to rise due to undersupply of inventory. “Landlords can charge higher rents, because there’s not much available,” he said. “We see that expanding in markets where there hasn’t been much rent growth, and that’s keeping the number higher. I don’t see the rate of growth decreasing.”

Some secondary and emerging markets are seeing significant rent growth as well as low vacancy rates, in addition to perennial demand centers such as New York, Chicago, Los Angeles and the nearby Inland Empire, and Charleston, SC and Savannah, GA in the south. They include Louisville, KY, Salt Lake City, Nashville, El Paso, TX and Milwaukee, according to CBRE. “All have seen rents grow 20% or higher in the last 12 months, with a big increase in demand and vacancy rates low,” Breeze said. “Those markets are seeing a lot of expansion.”

Rents in the Inland Empire east of Los Angeles have grown an astounding 72.1% in the past year, as the region acts as a staging area and distribution point for products arriving in busy California ports. It also boasts the lowest vacancy rate on the planet, at .2%, according to CBRE. This was followed by Los Angeles, with rents up 50.6% (vacancy rate of .6%), Orange County, CA, up 37.3% (1%), central New Jersey, up 32.1% (2.1%) and Las Vegas, up 31.2% (1.1%).

For another record, there were 28 U.S. markets with commercial/industrial vacancy rates under 3% in Q2, CBRE reported. Markets with the lowest vacancy rates are along the coasts, near transportation hubs or near the fastest-growing metro areas in the country.