CW-Q3-2018-MarketBeat_Industrial

U.S. Industrial Q3 2018 MARKETBEAT

Northeast and fell slightly in the West. There is currently 285.4 msf of industrial product under construction of which 199.4 msf is speculative, 70% more than the 5-year historical average of 104.9 msf. Development of all sizes remains concentrated in a handful of markets, but activity is ticking up across the country. This is evidenced by the Inland Empire, Dallas/Fort Worth, Atlanta, Chicago, and the Pennsylvania I-81/I-78 Distribution Corridor still accounting for more than one-third of product under construction, but 45 additional markets currently having more than 1 msf under development. Rents Rise Above Replacement Costs: U.S. industrial rents increased 5.9% in the third quarter of 2018 from a year ago, rising in 53 markets—20 of which posted double-digit gains. The strongest rent growth occurred in San Francisco North Bay, Central Valley California, Central New Jersey, Seattle, Sacramento, Boston, Long Island, Memphis and Pittsburgh—all markets in which average asking rents rose more than 15% year-over-year. Although overall asking rents currently stand at a high of $6.15 per square foot, on an inflation-adjusted basis rents remain 4.3% below their level at the height of the last cycle. Rent growth has lifted rents above replacement costs in many markets, which—when taken in tandem with tight conditions and continued demand—will bolster additional development. Nevertheless, rising construction costs and the conservatism among developers that has been a hallmark of the current expansion will promote prudence and keep industrial rents from being watered down from a wave of speculative supply. Booming Freight Economy: The outlook for consumer spending and retail sales is positive, and that for eCommerce even more so: online sales are forecast to grow by double- digits throughout the next three years. And despite concerns over trade policy, the primary drivers of industrial leasing exhibit strength. Ports are bustling, industrial output was the highest ever in August, and the Association of American Railroads reports that the last two weeks of September 2018 were the two highest-volume U.S. intermodal weeks on record. Inflation remains the greatest near-term risk. Eventually, higher input and product costs—as measured by the producer price index (PPI)—could result in higher consumer prices which could stifle consumption and demand for industrial real estate. Recently, the PPI has been ticking upward—and not just as a result of tariff-related price effects. Transportation and storage costs are rising rapidly. Despite the inflationary headwinds, the U.S. economy and the industrial property market are expected to perform well in 2018 and 2019.

Few Signs of Overbuilding YEAR-TO-DATE SUPPLY & DEMAND FUNDAMENTALS

25

Speculative Deliveries (MSF)

Build-to-Suit Deliveries (MSF)

Net Absorption (MSF)

20

15

10

5

0

Source: Cushman & Wakefield Research

Markets Remain Tight

10% 12% 14%

Prior Cycle Lows (2002-2007)

Q3 2018 Vacancy

0% 2% 4% 6% 8%

Source: Cushman & Wakefield Research

Development Pipeline Building Q3 2018 INDUSTRIAL PRODUCT UNDER CONSTRUCTION

10 15 20 25 30

Speculative U/C (MSF)

Build-to-Suit U/C (MSF)

Outlook

• Net absorption will surpass 250 msf in 2018 for a third year in a row, and eclipse 100 msf for a sixth consecutive year in 2019. • Supply will modestly outpace demand with the overall industrial vacancy rate remaining in the low-to-mid 5% range through 2018 and 2019. • Rent growth will remain strong in 2018 and gradually begin to decelerate in 2019.

0 5

Source: Cushman & Wakefield Research

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