Industrial Sector Update 11/8

E-commerce and the Shortage of Big-Box Industrial Space”

For the past five years, the net industrial absorption rate (the rate at which property is bought over time) has exceeded the rate of space completion, resulting in a scarcity of available space. This year, industrial space absorption is expected to exceed the completion thereof by 48 million sq. ft., and it is predicted that this shortage of space will continue into 2016. This supply imbalance has predominantly influenced the big-box market (industrial spaces exceeding 500,000 sq. ft.), since the major reason for the imbalance is the rise of e-commerce and its increasing demand for large warehouses. Amazon, for instance, has recently built a 1.1-million-sq.-ft. warehouse in Kenosha, Wisconsin, after having been unable to find sufficient space in Chicago. Another consequence of rising e-commerce is an increasing number of outdated properties, since technology tenants want new features like higher ceilings, more parking, space for racks, and electricity for robotics, with which most of the older buildings are unequipped. As a result of the lessened big-box supply in primary markets, most users are moving from primary markets like Chicago and Philadelphia, to secondary markets like Indianapolis and Lehigh, which have close proximity and strong connectivity to the industrial centers; this trend is likely to continue into the near future.

“Increasing Demand Leads to Decreasing Industrial Vacancy in New Jersey”

According to New Jersey market reports released last month, industrial vacancy in the state has dropped to its lowest rate since the recession. This has come about as a result of the sustained, high demand within the industrial market, and as more firms move southward from the lack of available space in New York. More specifically, as absorption of real estate continues to exceed new development, occupancy rates and competition for space are rising steadily. With projected retail and online sales continuing to increase, the trend is likely to continue into 2016. The greatest gains in space occupation have been in central New Jersey around the Turnpike (most of the gains, totaling 5 million sq. ft., have been in Middlesex County), as more and more tenants are moving from New York City because of the high demand for space and low supply of industrial real estate in New York and northern New Jersey. The state’s industrial rents continue to be lower than those in New York, which is attractive to new tenants. Rents are, however, steadily increasing as a consequence of New Jersey’s rising manufacturing sector and its decreasing vacancy rates, and are currently at an all-time high in certain areas. The majority of new construction is concentrated around the main Turnpike, and, as this continues, firms are moving toward the construction of spaces with smaller footprints (all but five of the current projects are under 200,000 sq. ft.).