Vacancy Will Rise As Demand Weakens and Inventory Is Returned to the Market
The industrial sector is proving to be the most resilient among the major property types through the pandemic, supported by continued growth in e-commerce and logistics. Manufacturing is at risk, however, as supply chain disruptions and reduced exports weigh on the sector. Unlike distribution hubs like Columbus, where logistics will support demand going forward, Cleveland’s outsized share of manufacturing space will result in negative demand.
CoStar’s baseline forecast expects 2.6 million square feet of industrial space to return to the market by the end of the year. Leasing activity points to softening demand, with activity in the first six weeks of the second quarter down about 20% from the same period last year. Over the longer term, a renewed focus on supply chain resiliency and re-shoring could boost demand for manufacturing space and support leasing activity.
Industrial rent collections have remained healthy during the pandemic and rent growth has yet to reflect any adverse effects. This is expected to change in the coming quarters, as rent growth turns negative in the second half of the year. In Cleveland, industrial rents could fall by 7%, but recovery is quick, and rents return to early 2020 levels by mid-2021.
Transaction activity held up in the first quarter and total sales volume was among the highest in recent years. As buyers and sellers await clarity on the path of the virus and economic recovery, investor activity is expected to slow. Asset values will also be affected and prices could fall by around 18% next year.