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Commercial Department: Property TypeCast: June 2018


Property TypeCast

Occupancy growth slows in the industrial-space market

c_2018-06_property_typecast_chart.jpgThere is a tremendous amount of new construction in the pipeline for the industrial-property sector. Indeed, quarter over quarter as of first-quarter 2018, the numbers show that inventory growth far exceeded occupancy growth, a fact that has pushed up vacancy rates in both the warehouse/distribution and flex/R&D sectors of the industrial-property market.

This setback is hardly alarming. Vacancy rates over the period only increased 10 basis points. What is troubling in the first-quarter 2018 numbers is not the high volume of construction, but rather the low occupancy growth, and that warrants a more thorough review.

The overall vacancy rate in the U.S. warehouse/distribution sector climbed to 9.1 percent this past first quarter, up from 9 percent at the end of 2017. Again, this is not alarming, but the underlying numbers show that net absorption was the lowest in three years. Net absorption also was low in the flex/R&D space, which helped to push up the vacancy rate in the sector to 9.8 percent as of the end of the past first quarter, compared with 9.7 percent at the end of 2017.

Construction of industrial properties also decelerated this past first quarter after soaring during the last two years. This can be viewed as a positive adjustment, but the large number of projects in our database suggests that completions this year should approximate the level in 2017, which was 19 percent higher than completions in 2016. Thus, if net absorption continues to decelerate, vacancy rates will continue to increase.

One indicator that tracks occupancy closely is employment in the warehouse and storage industry. Indeed, this was one of the fastest-growing industries over the last few years, but growth decelerated in 2017, with only 66,000 jobs added, after some 98,000 jobs were added in 2016. First-quarter 2018 growth also was subdued at 5,200 jobs. (The chart on this page tracks those figures.)

So, is this employment deceleration a telltale sign or just a temporary correction? A quick look at the retail sales data shows that e-commerce sales growth was 10.3 percent in 2017, down only slightly from 11.1 percent growth in 2016.

Overall retail sales — net of e-commerce, autos and gasoline sales — grew a respectable 2.6 percent last year, up from 2.2 percent in 2016. The Tax Reform and Jobs Act enacted late last year is expected to boost after-tax household and business income, which should help both the retail and industrial sectors. In other words, the occupancy numbers should rebound in the second and third quarters of this year. Construction of new properties, however, is expected to pick up as well.

So, the bigger question remains: Is there a limit to the growth in e-commerce? How many more warehouses do we need? And most notably, if the U.S. engages in a trade war with escalating retaliatory tariffs, how might this impact the industrial sector?

The answer to these questions would entail a lengthy discussion. As far as the industrial space is concerned, the more immediate barometer is rent growth, which, not surprisingly, also was the lowest in three years in the past first quarter. Warehouse/distribution rents climbed 0.5 percent, and flex/R&D rents grew 0.4 percent (for both market and effective rents). In the eight prior quarters, rent growth had held steady in the range of 0.8 percent to 1 percent for both subcategories.

Once developers see that rents have plateaued, they will put the brakes on new construction. It does not appear that developers with projects underway have reason to worry, but prospective developers and investors would be advised to monitor this data for their markets very closely.


Victor Calanog is chief economist and senior vice president for research at Reis Inc. ( He writes a monthly column on property types for Scotsman Guide. Calanog and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at Barbara Byrne Denham is an economist in the research and economics department at Reis Inc. She previously served as chief economist at Eastern Consolidated and is a Ph.D. candidate at New York University, where she has studied economics, monetary theory and game theory. Reach her at

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