E-Commerce Growth Restores Momentum to Industrial Real Estate Sector: Report
Executive Summary
The e-commerce sector, now comprising 18.8% of core retail sales, has stabilized and is driving steady growth in the industrial real estate market. With $291.6 billion in e-commerce sales in Q2 2024, demand for warehouse space is rising, though the market faces an oversupply after adding over 1.1 billion square feet from 2022-2023. Major players like Amazon have resumed leasing, and the industrial pipeline includes 369.3 million square feet under construction, though new starts have slowed.
Rents for industrial spaces increased by 7.2% year-over-year, with coastal markets seeing the highest growth, while the national vacancy rate rose to 6.7% due to the influx of new supply. Despite rising vacancies, key logistics hubs maintain lower rates. As e-commerce continues to expand, industrial real estate demand will persist, albeit with challenges from oversupply and vacancy increases.
Introduction
The e-commerce sector has emerged as a pivotal force driving the revival of the industrial real estate market in 2024. After a brief slowdown in 2023, the sector has stabilized and is now experiencing steady growth. According to the latest CommercialEdge report, e-commerce accounted for 18.8% of core retail sales as of the second quarter, reflecting its resilience and central role in shaping the industrial market landscape.
E-Commerce Sales and Industrial Demand
E-commerce sales reached $291.6 billion in Q2 2024, a 1.3% increase from Q1 and a 6.7% year-over-year rise, as reported by the U.S. Census Bureau. These figures underscore the ongoing expansion of e-commerce, now comprising the highest share of retail sales since the pandemic’s peak. This growth is generating heightened demand for industrial spaces, particularly warehouses, which play a crucial role in managing the logistics of order fulfillment and returns. E-commerce requires three times more space than traditional retail due to the intricacies of product handling and distribution.
Industrial Space and Employment
The demand for industrial space has been accompanied by a recovery in the warehouse and storage labor market. Through August 2024, the sector added 24,900 jobs, reversing the employment declines of 8.5% from May 2022 to December 2023. As a key player in this space, Amazon, after pausing projects and subleasing space during the slowdown, has resumed its leasing activities in 2024. Despite the return to growth, the industrial real estate sector is facing an oversupply challenge, with over 1.1 billion square feet added between 2022 and 2023.
National Industrial Pipeline
As of August 2024, 369.3 million square feet of industrial space was under construction, representing 1.9% of total stock. Development remains active, though at a slightly reduced pace compared to the pandemic boom years. Some of the most significant markets for new development include:
Between 2020 and 2023, a record 1.9 billion square feet of industrial space began construction. Although new starts have slowed in 2024, with 145.3 million square feet launched, this year is still expected to approach 2019 levels, which was a peak year for industrial development.
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Industrial Sales and Rents
In the first half of 2024, industrial sales totaled $36.9 billion, with properties trading at an average of $132 per square foot. While sales activity remains robust, coastal markets have experienced notable increases in rents:
Nationally, the average rent for industrial space in August 2024 was $8.11 per square foot, reflecting a 7.2% increase over the past year.
Rising Vacancies
Despite the continued growth in demand, the industrial real estate market is contending with rising vacancies, primarily due to the surge in new supply. The national vacancy rate stood at 6.7% in August, up 30 basis points from July and significantly higher than the 4% vacancy rate two years ago. However, some markets have maintained low vacancy rates, including:
Outlook for 2024
As e-commerce continues to grow and stabilize, its role as a major driver of industrial real estate demand is expected to persist. The sector’s requirement for large, efficient warehouses and fulfillment centers will keep it at the forefront of the industrial market. While the oversupply and rising vacancy rates present challenges, the long-term outlook for industrial real estate remains positive, supported by strong fundamentals in key logistics and distribution hubs.
Industrial space development, though moderated from the pandemic surge, is set to maintain historically high levels, ensuring that the market can meet evolving logistics needs in the future.
Conclusion
The industrial real estate market in 2024 is experiencing renewed momentum, driven by the steady growth of e-commerce, which now accounts for a significant portion of core retail sales. As consumer demand for online shopping persists, the need for expansive warehouse and distribution space continues to rise, despite challenges posed by oversupply and rising vacancy rates. The recovery of employment in the warehouse sector, alongside key players like Amazon resuming their leasing activities, signals ongoing demand for industrial properties.?
However, the market faces potential headwinds from the massive influx of new supply over the past two years, which has led to elevated vacancy levels. Despite this, the long-term outlook remains positive, with industrial spaces in strategic logistics hubs maintaining robust demand. E-commerce’s central role in driving the industrial market forward will likely continue, ensuring that the sector remains a critical part of the commercial real estate landscape in the coming years.
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