U.S. Industrial Supply Will Outpace Demand For Years, But Brokers Aren’t Worried

Industrial brokers across the U.S. are optimistic about the outlook for the sector, despite expectations that supply will outpace demand for the next few years in most markets.

North American demand overall is expected to trail supply by about 125M SF in 2021 and 90M SF in 2022, causing vacancy rates to rise from current record-low levels, according to Cushman & Wakefield’s 2021 industrial outlook report.

Cushman & Wakefield Vice Chairman Jeffrey Cole said that even before the pandemic, his firm was expecting an excess of U.S. industrial supply. Amid the soaring popularity of the asset type over the past year and an ongoing flurry of development, that prediction continues to hold true.

But strong demand should help keep vacancy rates low and support rising rents.

“It’s going to modestly increase vacancy, but in our opinion, will not change the trajectory of rental rates,” Cole said during a Bisnow webinar March 31. 

Industrial received a huge boost from the coronavirus pandemic, as consumers embraced online shopping on a widespread scale. That translated into aggressive real estate plays by e-commerce giant Amazon, which accounted for more than 15% of industrial activity in the U.S. during 2020, according to CBRE Senior Vice President Jackie Orcutt.

Demand for e-commerce goods and services in the U.S. has been growing exponentially, but future demand for industrial properties could also be generated by demand in Mexico, which lacks the same inventory.

“I think you'll see the United States industrial market benefit from just our neighbors to the south as [they increase] their demand on e-commerce,” Orcutt said.

Orcutt noted that she expects reshoring activities by manufacturers to also drive future demand, as many companies found themselves cut off during the pandemic and are now looking to safeguard their supply chains.

“We'll start to see a shift of reshoring for medical, defense-related manufacturing. The technology market with semiconductor manufacturing and battery manufacturing is probably going to take a shift to the U.S.,” Orcutt said.

Another question is whether other major real estate users, like third-party logistics firms and big-box retailers, will choose to start mimicking Amazon’s expansion strategy.

“I think the story to watch this year, next year, on that topic is the non-Amazon companies ... starting to see if those models [are] mimicking Amazon, if they really start kicking in,” Cole said. “That would really be even a further boom.”

Amazon’s influence on the U.S. industrial real estate sector is huge — in fact, so huge that there are some concerns that the online retailer could end up saturating the U.S. market with build-to-suit products that only work for their evolving business model. The fear is, some of those buildings could end up being obsolete within a decade.

“In our business, there's buyers [and] investors who will not now buy Amazon-leased product. They just feel they're too exposed. There's been so much of it. That's a little bit of an anecdotal red flag that they might be overexposed,” Cole said.

While industrial supply may be plentiful as a result of soaring demand and speculative development, that could eventually fade. Sentry Commercial President and SIOR President Mark Duclos noted that because construction costs and materials are so high, some developers are opting to put speculative projects on hold.

“Look at construction costs. Steel [has] almost tripled in price. I was in Atlanta last week, and I asked a large national construction company about that. And I said, are you seeing it affect construction? He says, actually, I'm seeing it affect speculative construction,” Duclos said.