Industrial Rent Growth, Pricing May Level Off in 2021

Robust E-Commerce Demand to Prop Up Warehouse Fundamentals

By Randyl Drummer

The warehouse and logistics construction boom are gradually increasing average U.S. industrial vacancy rates and it’s projected to cause rent and sales pricing to temporarily plateau in coming quarters.

Leasing and development continued to surge amid strong demand for virtually any type of industrial building as online shopping again posted double-digit increases in October, CoStar managing director and senior economist Abby Corbett said in her latest video on the state of the U.S. industrial market.

CoStar’s base case forecast anticipates demand to be offset by new supply that is expected to lift the U.S. vacancy rate to the mid-6% range by 2022.

Industrial landlords see healthy rent growth for now, but CoStar’s current base forecast expects that expansion to level off early next year. Steady demand is expected to keep rents from falling into negative territory, Corbett said.

However, Corbett said investors should also consider a “moderate upside” scenario of continued albeit slower rent growth of 1% next year, as e-commerce growth and other factors work in favor of logistics demand. Under this scenario, strong demand would help rent growth resume and accelerate markedly in 2022, ending the year 11.2% higher than current levels.

Robust demand and relatively tight vacancy conditions are contributing to healthy industrial rent growth, even as other sectors grapple with space givebacks, weak demand, quickly rising vacancy and falling rent growth.

Investors became notably more active in the capital markets in October after transaction levels cooled in the third quarter. Investment sales volume increased 88% in October over the average monthly levels recorded by CoStar since the first month of the pandemic in March, Corbett said.

Like the temporary plateau in rents and sales, growth in warehouse sale prices, which started to cool last quarter, is expected to remain flat through next year. CoStar expects that as investors become more confident about the economy next year, property income will gain traction in 2022 and price growth will return to a pre-pandemic pace of above 5% throughout 2023 and 2024, Corbett said.