U.S. industrial markets absorbed 64.1 million square feet in the second quarter of 2018, up 4.9 percent from the same period a year ago, and propelled year-to-date absorption to 126 million square feet, according to Cushman & Wakefield’s U.S. industrial second quarter 2018 report.
Demand during the second quarter continued to be impressive and broad-based. Leasing accelerated in nearly half of the United States during the second quarter, with 29 markets posting more than 1 million square feet of absorption through the first half of 2018 as occupiers further expanded their footprints.
Every industrial segment remained in growth mode. Through midyear, logistics-related warehousing posted 113 million square feet of net occupancy gains, manufacturing registered 7.2 million square feet and flex space recorded 3.7 million square feet. Every U.S. region performed well during the quarter, with the South and the West leading absorption gains and the Midwest posting the greatest year-over-year improvement. Markets where demand was strongest include Inland Empire (13.3 million square feet), Dallas/Fort Worth (11.7 million square feet) and Chicago (9.8 million square feet). Given its performance in the first half of 2018, U.S. industrial net absorption is on pace to eclipse the net occupancy gains in 2017 and rank among the top five years on record.
Construction starts jumped nationally by 8.1 percent quarter-over-quarter with 41 markets reporting construction starts up in the second quarter of 2018. The largest uptick in construction activity occurred in the South, while the development pipeline increased modestly in the Midwest and West and fell in the Northeast.
Currently, there is 267.2 million square feet of industrial product under construction, of which 178.3 million square feet is speculative, 70 percent higher than the five-year historical average of 104.9 million square feet. Space options remain particularly tight in the 100,000- to 250,000-square-foot size segment where new supply has lagged and leasing demand has popped. As a result, construction activity for mid-sized industrial product rose 15.9 percent over the second quarter, nearly double the increase of big-box development. Development of all sizes remains highly concentrated in a handful of markets, but activity is increasing across the country. Although the Inland Empire, Dallas, Atlanta, the Pennsylvania I-81/I-78 Distribution Corridor and Savannah account for more than one-third of product under construction, 49 markets currently have more than 1 million square feet in development.
U.S. industrial rents in the second quarter of 2018 increased 7.2 percent from a year ago, rising in 58 of 79 markets; 18 markets reported double-digit gains. The strongest rent growth occurred in San Francisco, Pittsburgh, Baltimore, Jacksonville, Seattle, Sacramento, Raleigh/Durham, Atlanta, Central Valley California and Central New Jersey — all markets where rents increased more than 12 percent year-over-year. Although overall industrial rents currently stand at a high of $6.11 per square foot, on an inflation-adjusted basis, rents remain 4.8 percent below their level at the height of the last cycle.