Another Banner Year for Industrial Real Estate
The U.S. economy grew by 2.3% in 2019 and is in its longest expansion on record. After adding 2.1 million jobs, the nation's unemployment rate ended the year at 3.5%, the lowest level since 1969. Strong consumer confidence led to an increase in year-end retail sales, but business investment slipped amid slowdown concerns. Wage growth is sluggish, ongoing trade disputes with China are negatively impacting an already struggling manufacturing sector, and GDP growth, while still positive, grew at its weakest rate in the last three years.
Despite this national slowdown, the pace of the Indianapolis industrial market is as solid as ever. Companies are expanding operations and leasing space at previously unseen levels, marked by a 15.9% increase in net absorption and 25.5% jump in leasing activity. A record 11.2 MSF of new construction was completed in the year, including 6.7 MSF of speculative space, yet the market vacancy rate remained virtually unchanged.
E-commerce-only occupiers continue to make headlines for their growing footprint, but these tenants trailed two other occupier types in 2019. Third-party logistics companies remain the top occupier, accounting for one-third of all transactions in the last 24 months as retailers and wholesalers seek to reduce costs by outsourcing these services. Food and beverage occupiers were the second most active as they aim to expand and modernize their distribution and manufacturing networks.
Investors are seizing on this strong and active sector of the real estate market. Investment sales activity nearly tripled year-over-year. exceeding $1 billion of traded assets in 2019, and capitalization rates are being compressed to record lows.
The volume of occupier activity is weighted towards modern bulk projects, but traditional and medium-distribution facilities still boast a 97.2% occupancy rate. The tight vacancy gives tenants seeking relocation minimal options outside of new construction and puts upward pressure on rental rates. For owner/occupant users, low inventory is pushing up property list pricing, making now a good time to sell.
Small operations and expanding local companies have been leasing up vacant space in flex buildings at an unprecedented pace. The vacancy rate for light industrial product reached a record low 5.6% in Q3 19 and ended the year at 5.7%. Asking rental rates are on the rise and increased by 7.8% on average across all submarkets over the last 12 months.
Statistical indicators including net absorption, leasing activity, rent growth, vacancy rates, and construction completions all reached historic levels in 2019. Indiana's appealing tax structure, strong labor quality, low operating costs, and other business-friendly regulatory frameworks are continuing to draw logistics and manufacturing operations to the Indianapolis industrial market. Developers are bullish the momentum will continue and have 11.1 MSF of speculative product under construction moving into 2020. In 2019, nearly 75% of all square footage delivered to the market had occupier commitments by the end of the year. While a slowdown in national economic growth could hamper momentum, the Indianapolis industrial market has proven resilient in previous economic downturns, and another strong year is predicted.