Recently, the occupancy and absorption rates for industrial on the West Coast went down for the first time in several years. CoStar reports that despite the unexpected dip, industrial will recover in 2018, though headwinds loom in 2019.
California Industrial Has Been Booming
News of the slowdown was unexpected, particularly in California where industrial has come in second only to multifamily for the last two years. Commercial lending is up year-over-year in industrial by 15%.
This year, industrial has been leading all property types overall hitting its lowest vacancy rate in years last year. That is while new construction is also at a record high combined with a booming e-commerce sector.
Slight Dip but a Big Rebound Predicted in the West
Overall, the year is going to end the same experts predict, despite the drop this year in vacancy rates. The numbers look worse because of the success of the last few years. Between 2016 and 2018, this dip is a 14.5% drop.
However, from last year to this, the biggest decrease in vacancy rates is in the south – 5.4% dip. Nationally, the drop will be countered by an 8.2% surge expected in the fourth quarter of this year to round out at a negligible 0.3%. The West Coast is going to see the biggest increase at 14%.
Net Absorption Predicted to Drop by Over 33% in 2019
Forecasters predict that we will see an increase above 22% in the net absorption rate in the 4th quarter of this year. However, those numbers are expected to have a precipitous and pronounced drop in the West of close to 34% next year.
The West Coast is not alone. Almost every region experienced a drop in net absorption at the beginning of the year. The northeast saw the biggest decline of over 40%. On the West Coast, net absorption increased (the only region that saw growth in net absorption) by almost 9% between the first quarter of 2017 and the first quarter of 2018.
Despite the good news expected for the West Coast by the end of this year, experts predict net absorption to go down in every region next year. The Midwest is predicted to see a near 30% drop while the northeast will see the smallest decline; 3.2%. But the West Coast is set to get hit the hardest with absorption rates falling 33.8% in the first quarter of 2019.
Trade Wars Could Slow E-Commerce—therefore Industrial
Looming over all of the numbers is the unknown effect that the new trade war initiated by the U.S. will have on the supply chain for e-commerce. Industrial’s recent success over the last several years is due in large part to the e-commerce boom.
However, tariffs and now a threat from China to block certain supply chain routes could slow the economic boom being created globally by e-commerce. In response, the market will experience a pull back in demand and investment in the commercial real estate industrial sector.
