The North American big-box market is riding a wave of robust demand brought on by a solid U.S. economy and, of course, the rapid rise of e-commerce. E-commerce demand continues to grow and now represents over 10% of total non-auto retail sales. This demand continues to fuel activity with overall net absorption hitting an all-time high of 116 million square feet, 2.4% higher than 2016. Record amounts of absorption kept the overall vacancy rate at an all-time low of 6.9% despite a record 128 million square feet of new development.
Activity continues to be dominated by Amazon.com, which leased 10 buildings totaling just under 8 million square feet in the 14 markets highlighted in this report in 2018. Continued demand from Amazon along with other retailers, wholesalers and third-party logistics companies will keep development high in 2018 as a record 120 million square feet is currently under construction .
On the investment side, capitalization (cap) rates dropped to a record-low 5.8% in 2017, with many core markets posting cap rates at or near 5%. While demand for big-box product was solid in core markets, the decreased amount of product to purchase in these markets has pushed investors into secondary markets, where fundamentals are improving and there are more opportunities for higher yields.
While we predict 2018 fundamentals to remain robust, there are headwinds to look for. The issue causing the greatest concern is the availability of labor. The demand for labor has been magnified by e-commerce distribution’s heavy employee counts and significant seasonal spikes in demand. Big-box e-commerce occupiers can require two to three times the amount of labor as a traditional distribution user needs. With labor demand increasing, more companies will require more advanced site selection processes to grind down the exact submarkets where available labor can be found, and this process in site selection will gain importance over a submarket’s logistics advantages and building functionality.
Trade policies also bear watching. When we entered 2017, U.S. trade policy seemed to be on solid ground, NAFTA was making headway in negotiations and trade pacts with China were solidifying. This changed the second half of 2017 with word that the future of NAFTA was less certain and tariffs were issued for foreign products including solar panels and appliances. While policies that affect NAFTA and trade with Asia have not been set in stone, they both warrant watching and could have a major impact on demand in late 2018.
Despite these headwinds, the big-box market seems poised for continued growth: the North American economies remain strong, e-commerce continues to grow at a faster rate than traditional in-store retail and logistics drivers from the air, ground, sea and rail continue to post gains. These drivers should outweigh the headwinds and create strong demand and rental rate growth in big-box markets for the foreseeable future.