Another Banner Year Ahead for Industrial Market

Prologis Inc.'s new U.S. Industrial Business Indicator signals 12 more months of expansion in the sector following 2019's strong performance.

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The industrial sector closed 2019 in a strong position, paving the way for another robust year in 2020, according to leading logistics real estate provider Prologis Inc.’s new report, U.S. Industrial Business Indicator – January 2020. The IBI, Prologis’ proprietary survey of customer sentiment, reached 61.4 in the fourth quarter of 2019 and utilization hit 87 percent, suggesting a minimal availability of shadow space in the market as customers made full use of existing properties.

Buoyed by accelerated consumption and a strong showing by e-commerce users, demand for industrial real estate increased by 240 million square feet in 2019. The figure marked a continued period of normalcy, first seen in the third quarter following the untenably high numbers recorded in 2018. Supply rose in lower barrier locations, with development activity increasing as a result of the investment community’s enthusiasm for the industrial sector. Completions rose 3 percent year-over-year to 275 million square feet.

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Overall, absorption was on par with new deliveries in 2019 and the supply-demand dynamic allowed historically low vacancy rates to persist in the mid-4 percent range. “Demand for high-quality, well-located logistics properties has exceeded supply for over a decade. This continues to be the case in many U.S. markets, particularly in Last Touch locations where developable land near consumers is scarce,” Melinda McLaughlin, vice president of research with Prologis, told Commercial Property Executive.

Additionally, rental growth totaled 8 percent. Prologis attributes the upswing to the dearth of available square footage and increasing replacement costs, particularly in coastal metropolis markets. The skyrocketing price of land drove the cost of construction to peak numbers in the majority of markets.

The Crystal Ball

On the heels of a fruitful 2019, more of the same is on tap for the industrial sector in 2020, according to Prologis. E-commerce users are projected to expand their presence in the sector this year, spurring an increase in absorption by 250 million square feet. Supply is forecasted to total 275 million square feet, although there’s a risk of oversupply in Central Pennsylvania and outlying submarkets of Houston and Atlanta.

Net absorption will likely reach 250 million square feet and the national vacancy rate will continue to hover at record lows at approximately 4.6 to 4.7 percent. Rents will rise in 2020, as developers will be forced to charge higher rates to mitigate the increasing cost of new projects. Essentially, the U.S. industrial sector is in for yet another year of expansion, and with ongoing diversity in demand and continued low vacancies, Prologis advises users to plan in advance for impending space needs in 2020.

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