Between the record-breaking activity in the second quarter and the lull that summer months often bring, many expected more normal growth patterns for U.S. industrial real estate in Q3 2016. But industrial sector fundamentals powered forward in the third quarter to reach new heights. Net absorption crushed the previous record, construction reached all-time highs and asking rental rates rose for the 13th consecutive quarter.
National demand continues to be driven by strong e-commerce sales and steady economic fundamentals. Activity is robust in core industrial markets and is expanding rapidly in secondary markets near inland ports and large population centers. Retailers, wholesalers and third-party logistics companies are all scrambling to find space near these locations to gain competitive advantage and get products to consumers faster.
Industrial rents remain a relatively small portion of overall supply chain expenses and as such, we expect to see warehouses absorbed at an elevated rate for the foreseeable future. Only an unexpected disruption to the overall economy will slow the flow of industrial demand in the coming year.
Tightening markets and new, more expensive Class A space, drove up asking rents in Q3 2016 to $5.75 per square foot per year (PSF/ YR), an all-time record for the country (not adjusted for inflation). Asking rents for distribution space increased year-over-year in 89 percent of the markets we track.
After a slow first half of 2016, an uptick in large portfolio sales helped increase transaction volume to $14 billion in Q3 2016, a 3 percent increase over Q3 2015. Single-building investors continue to push into secondary and tertiary markets, with sales increasing 11 percent compared with the same time last year.