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Industrial Real Estate Vacancies Reach a Record Low of 4.2% in December

By Kristi Waterworth – Dec 8, 2021 at 7:00AM

Key Points

  • Demand for industrial real estate is outpacing the supply and has been all year.
  • The growth of e-commerce and just-in-case supply chains is changing industrial needs.
  • The best time to invest in industrial real estate was a year ago, but today is still pretty good.

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There's not nearly enough industrial real estate for all the ways we need it. This has been creating massive opportunity for investors in the space.

If there was ever a time to invest in industrial real estate, it was about six months ago. But today is also good, since the sector continues to grow explosively. The National Association of Realtors (NAR) released some new numbers on the industrial sector, and to almost no one's surprise, there's still not enough room for everyone who wants to rent industrial space.

Industrial real estate, for the uninitiated, includes such sexy properties as warehouses, factories, fulfilment centers, and shipping hubs. This is largely why it's been such an overlooked space -- these are basically invisible industries to the modern American. But the pandemic has created a remarkable amount of growth potential in this space, virtually overnight.

Workers in a warehouse sort packages as they travel down a roller conveyor.

Image source: Getty Images.

Industrial space is essentially sold out

According to NAR's December figures, industrial real estate continues to see demand grossly outpacing supply for the fourth quarter in a row, inclusive of the fourth quarter of 2021. Net absorption has already exceeded 485 million square feet for the year, even though Q4 hasn't closed yet. This is a dramatic change from the 12-month period that spanned the third quarter of 2020 to the third quarter of 2021, which recorded another record of 453 million square feet.

Industrial has always had kind of a low historical vacancy rate, but nothing like the 4.2% that it's hit in Q4 2021. That's down from Q3's 4.6% vacancy rate, and the prior record low set in Q3 2018 of 4.7%. Frankly, the highest vacancy rate that's been seen during the 2020s (all smothered in pandemic-related challenges), was 5.6%, in Q3 2020.

During the Prologis (PLD -3.38%) earnings call in late October 2021, CEO Hamid Moghadam summed it up nicely: "With vacancies at unprecedented lows, space in our markets is effectively sold out."

Industrial rents keep increasing

Of course, all these low vacancies are going to result in higher rents across the board, but just how high can you go before businesses will start to pull back? Apparently, we've not found that number yet. In Q3 2021, industrial space was renting for an average of $9.51 per square foot, but it was at $9.72 as of December 1, 2021.

Year over year, rents have increased 8.2% across all industrial classes, and all 390 metro areas that NAR monitors have seen increases in industrial rents. Miami is the top performer, with a 14% year-over-year gain, but other metros are seeing colossal gains, too, including Northern New Jersey (13.7%); Nashville, Tennessee (13%); Philadelphia (12.8%); and Fort Lauderdale, Florida (12.3%).

What's driving this surge in demand?

There has always been reasonable demand for industrial space, but what we're seeing right now is downright unprecedented. There are several reasons for it, of course, and if I had only one word to use to describe it all, I'd just throw my hands up in the air and shout "PANDEMIC!" at the top of my lungs. But that's not what we do here, so let's look at the actual factors involved.

First, and probably most importantly, eCommerce has seen an explosive gain in market share. According to the U.S. Department of Commerce, e-commerce saw a 39.1% increase in sales volume year over year from Q1 2020 to Q1 2021. That's a non-adjusted figure. The adjusted figure is 39.3%. So, from the start of the pandemic in Q1 2020 to a year later, e-commerce got catapulted something like a decade down the timeline. It's only been growing since, though not as dramatically.

With so much new e-commerce business, there have to be new shipping hubs, new sorting facilities, new warehouses to store all the goods before they're picked and shipped, even new last-mile facilities. All this "stuff" takes up space, even if it's not staying around for long.

Secondly, many retailers, e-commerce and traditional, are moving from a "just-in-time" supply model to a "just-in-case" model. Just-in-time supply chains rely on the speed of a "normal" supply chain to produce and move products as they're needed, so companies don't have to rent so much storage space for things that might not sell right away. That was the old way. Just-in-case models, on the other hand, rely on stockpiling products so that they're available regardless of what the supply chain is doing (or not doing).

Guess where they're sticking all that excess inventory. Warehouses. Correct. You get a gold star.

Building enough industrial space is tricky

It should be easy enough to throw up an industrial building and reap the benefits of this explosive market, but it's just not that easy right now. Long-term labor shortages in the construction industry have already put a huge crimp in the style of builders across the spectrum, and now, supply chain problems are continuing to wreak havoc on building-product costs, as well as building-product availability.

Is it just me, or is it a little bit ironic that part of the bottleneck slowing down the construction of more warehouses is that there aren't enough warehouses to store building supplies?

Kristi Waterworth has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Prologis. The Motley Fool has a disclosure policy.

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