E-commerce Continues to Fuel Industrial Expansion

The ongoing and robust e-commerce boom significantly increases the need for triple the usual logistics space. Image by gorodenkoff/iStockphoto.com

The pandemic-triggered surge in e-commerce significantly increased demand for industrial real estate, according to the latest CommercialEdge industrial report. Even though e-commerce sales have seen a 74 percent boost since early 2021, a substantial portion of this sudden increase occurred primarily in the second quarter of 2021. Notably, pre-pandemic, the growth rate was higher than the average growth seen post-pandemic. This sustained e-commerce surge continues to drive a considerable threefold demand for logistics space, requiring both expansive facilities and smaller, localized centers to facilitate speedy last-mile deliveries.

Traditional retailers such as Walmart are adapting to this trend by incorporating automated fulfillment centers to optimize their delivery efficiency. The e-commerce industry remains a dominant force fueling growth in the industrial sector, emphasizing the ongoing necessity for a diverse array of spaces to accommodate changing consumer demands and streamline logistical operations.

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Industrial investment year-to-date through September amounted to $40.3 billion, CommercialEdge data shows. Industrial properties traded at an average of $135 per square foot. Despite challenges, the average sale price increased by $11 per square foot, or 9 percent, this year. Certain markets continue to maintain their rapid upward trajectory in prices, consistent with the trend observed since the onset of the pandemic.

The under-construction pipeline continued to shrink, featuring 535.6 million square feet of industrial space at the end of September, or 2.9 percent of total stock. Although historically robust in most markets, the active pipelines diminished this year due to a sharp decline in project starts. This response is attributed to the adjustment of e-commerce demand to more usual levels and the increased cost of capital.

Phoenix boasted the country’s most extensive pipeline in relation to the percentage of available stock, with 46.6 million square feet underway, making up 12.7 percent of the market’s total stock. In Dallas-Fort Worth, 49.3 million square feet of space was under construction, accounting for 5.4 percent of total stock, followed by Charlotte, N.C. (4.8 percent, 14.6 million square feet), the Inland Empire (4.7 percent, 29.6 million square feet) and Denver (4.2 percent, 10.7 million square feet).

Rising industrial rents: Coastal vs. inland markets

The national industrial vacancy rate rose 20 basis points from the previous month, clocking in at 4.6 percent at the end of September. Recent years have seen an exceptional increase in new supply. This influx of new inventory notably alleviated the challenge many occupants faced in finding suitable space. As of September, some of the lowest vacancies in the nation were recorded in Nashville, Tenn. (1.9 percent), followed by Indianapolis and Phoenix, with 2.7 percent each.

At the same time, the average in-place rents for industrial spaces across the nation stood at $7.51 per square foot in September, marking a 740-basis-point uptick compared to the previous year and a six-cent rise from August 2023. Coastal port cities have witnessed significant growth in in-place rents, while inland markets have experienced more moderate increases in 2023.

Markets such as Denver (3.1 percent), Chicago (3.4 percent), Cincinnati (3.5 percent), Detroit (3.6 percent) and Indianapolis (3.6 percent) saw relatively slower rent growth. An exception to this trend is Houston, with a 3.6 percent rise in in-place rents, despite hosting one of the nation’s bustling seaports.

Read the full CommercialEdge report.