Picture this: e-commerce packages flood in like tidal waves, businesses race against time to restock inventory, while global supply chains resemble congested highways. This scenario accurately depicts the current state of America's red-hot industrial real estate market. Recent data from Chicago-based CBRE clearly reveals this reality: with demand continuing to surge, industrial vacancy rates repeatedly hit record lows, rental prices climb steadily, and the imbalance between supply and demand becomes increasingly pronounced.
Vacancy Rates Hit Historic Lows as Demand Outpaces Supply
CBRE's U.S. Industrial & Logistics Figures Report Q3 2021 indicates multiple key metrics pointing to one conclusion: the industrial real estate market is experiencing unprecedented prosperity while facing significant challenges.
The report shows that the U.S. industrial real estate availability rate stood at 6.0% in Q3, well below the 30-year average. More strikingly, the vacancy rate dropped to a historic low of 3.6%, meaning nearly all available industrial space is being snapped up immediately. Meanwhile, market demand remains robust, with net absorption reaching 120.3 million square feet—41 million square feet more than new supply added during the quarter.
Year-to-date net absorption totals 291.9 million square feet, a 135% year-over-year increase that already exceeds the full-year 2020 figure by 28.5%. These metrics demonstrate exceptionally strong demand for industrial properties.
Rental Prices Reach Record Highs as Developers Accelerate Construction
In this supply-constrained environment, rental prices naturally rise. In Q3, the average U.S. industrial net asking rent reached $8.92 per square foot, setting a new record. Compared with Q2, rents increased by 3.1%, while the annual growth rate reached 10.4%.
To alleviate supply shortages, developers are ramping up construction. Q3 completions totaled 79.3 million square feet, up 36.1% quarter-over-quarter. However, factors like material shortages and rising costs have constrained construction progress.
Massive Pipeline Under Construction, But Bottlenecks Persist
Despite 448.9 million square feet of industrial projects currently under construction, CBRE predicts strong market demand will continue to depress availability rates. This suggests that even as new projects come online, the supply-demand imbalance won't fundamentally change in the short term. Market observers are watching how quickly these projects can become operational and whether they'll meaningfully ease current supply constraints.
"Delays are expected to persist, but there's evidence that more projects are reaching completion," said Matt Walaszek, CBRE Director of Research. He noted that while year-to-date completions through Q3 were down 6.1% year-over-year, Q3 completions rose 36.1% quarter-over-quarter to 79.3 million square feet. With nearly 450 million square feet under construction, Q4 2021 completions are expected to increase further.
Material Shortages and Rising Costs Create Market Uncertainty
Walaszek cautioned that worsening material shortages and cost increases could create greater uncertainty. "Material costs remain well above pre-pandemic levels, though lumber prices have fallen significantly since June," he said. "Steel prices spiked earlier this year but have since stabilized. Rising rents—up 10.4% overall since last year—are offsetting some cost increases and motivating developers to push projects forward at full speed."
Multiple Factors Drive Demand Growth
When asked whether businesses maintaining inventories above pre-pandemic levels and needing more safety stock represent primary drivers of warehouse space demand, James Breeze, CBRE Senior Director of Global Industrial & Logistics Research, said these are among key demand drivers—along with strong e-commerce sales, continued economic improvement, and demographic shifts.
"All these drivers will continue fueling tremendous demand for industrial space in 2022," he added.
Key Markets Outperform as Regional Variations Emerge
Among specific markets, Atlanta, Dallas/Fort Worth and Phoenix have the largest construction pipelines, totaling 94 million square feet as of Q3. For Q3 U.S. net absorption, Chicago led with 32 million square feet (8.5% share), followed by Dallas/Fort Worth (29.5 million), Pennsylvania's I-78/81 Corridor (22.8 million), Atlanta (22.8 million) and Houston (22.1 million).
Analysis of Demand-Side Drivers
Beyond e-commerce growth and safety stock needs, other factors propel industrial real estate demand:
Reshoring: Changing global trade patterns and government support for domestic manufacturing are bringing production back to the U.S., directly increasing industrial space needs.
Cold Chain Logistics: Growth in fresh food e-commerce and pharmaceuticals drives demand for specialized cold storage and distribution centers.
Last-Mile Delivery: To meet consumer expectations for fast delivery, companies are establishing small urban distribution centers, boosting demand for city industrial space.
Supply-Side Challenges
Beyond material issues, industrial developers face other obstacles:
Land Scarcity: Many cities have limited land available for industrial development, constraining new supply.
Complex Approvals: Industrial projects often face lengthy, multi-agency approval processes that extend timelines.
Labor Shortages: Construction industry workforce shortages impact project schedules.
Market Segment Analysis
The industrial market includes warehouses, distribution centers, manufacturing plants and R&D facilities, each with distinct conditions:
Warehouses/Distribution Centers: Benefiting most from e-commerce growth, these show strongest demand and rent growth.
Manufacturing Plants: Reshoring is gradually increasing demand, though conditions vary by industry.
R&D Facilities: Typically located near tech hubs or universities, these serve high-tech firms with relatively stable demand.
Regional Market Variations
U.S. industrial markets show significant regional differences:
Southeast: Led by Atlanta, benefiting from population growth and logistics hub status.
Southwest: Dallas/Fort Worth and Phoenix attract businesses with lower taxes and favorable business climates.
Midwest: Chicago's mature market features strong transportation networks and manufacturing bases.
Northeast: Pennsylvania's I-78/81 Corridor serves as vital East-West logistics connector.
Future Outlook
Looking ahead, key industrial real estate trends include:
Smart Technology: Increasing adoption of automation and smart systems to improve efficiency.
Sustainability: Growing emphasis on green features like solar power and energy-efficient materials.
Mixed-Use: More multifunctional spaces combining warehouses, offices and R&D in single campuses.
The U.S. industrial real estate market stands at a critical juncture. Strong demand and limited supply drive rising rents and investor returns, while material shortages, cost increases and supply chain bottlenecks create uncertainty. As construction projects complete, supply should gradually increase, but the supply-demand imbalance will likely persist in the near term. Investors and developers must monitor market dynamics closely and adapt strategies to navigate potential challenges.