Analysis by Barbara Byrne Denham
CALM BEFORE THE STORM
The effect of COVID-19 has yet to show in the industrial statistics for the first quarter of 2020. However, the Moody’s Analytics REIS protracted slump scenario, which represents a worst-case situation in which GDP contracts by more than 30% (annualized) in the second quarter, forecasts negative net absorption of 200 million square feet for the warehouse/distribution sector in 2020 as well as another negative net absorption of approximately 70 million SF in 2021. This will push the vacancy rate up to 12.8% at the end of 2021. Average asking rents and average effective rents are currently expected to decline 3.5% and 6.0%, respectively, by the end of 2021.
Industrial Effective Rent Growth
Source: Moody’s Analytics REIS
Most metros saw positive (effective) rent growth in the quarter, led by Fort Worth, Memphis, Miami, Charlotte and Orlando where the effective rents grew 0.8% to 1.2% in the quarter. Two metros saw an effective rent decline in the quarter: Suburban Maryland (-0.3%) and Pittsburgh (-0.2%). For the year, metros with the highest rent growth were mostly port cities: Orlando, Sacramento, Miami, Fort Worth and San Diego with growth rates of 3.2% to 4.1% for the year. These metros will see a sharp drop in cargo and activity in the second quarter but it is too early to say how deeply the drop in trade will impact occupancy and rent declines.
Barbara Byrne Denham is a Senior Economist in the research and economics department at REIS, the team responsible for the firm’s market forecasting, valuation, and portfolio analytics services. Throughout her 20-year career, Barbara has written a number of white papers on the commercial real estate market.