A record amount of industrial demand is transforming the shipping real estate landscape across North America, prompting analysts to point to the beginning of a transformation of secondary cities from Cincinnati, Ohio, to Tampa, Florida, into economic engines.

Cushman & Wakefield, one of the world's largest commercial real estate services firms, reported tenants moved into 507.3 million square feet of industrial real estate in North America this year, marking the first time on record demand has exceeded 500 million square feet. By the end of 2023, an additional 855 million square feet of industrial space is expected to be filled, the firm estimates. And CoStar market analysts say landlords appear up to the task of filling demand with plans to open a record amount of logistics space next year.

"Industrial is not slowing down," said Carolyn Salzer, Cushman & Wakefield's head of logistics and industrial research for the Americas, in a phone interview with CoStar News. "Industrial has never had aggressive lows and, until recently, no big highs, but with the pandemic it really exploded in 2020 with the acceleration of e-commerce. But there's still a ton of growth to be had yet."

With e-commerce growing and companies battling supply-chain disruptions with larger warehouse footprints, logistics companies are expanding to secondary North American cities, transforming portions of once sleepier areas that have seen huge population upticks in the past two years into larger distribution hubs. Those secondary cities include Cincinnati; Columbus, Ohio; Nashville, Tennessee; Orlando, Florida; Phoenix; Tampa, Florida; and the Interstate 81-Interstate 78 distribution corridor in Pennsylvania.

"With more people, they need more inventory," Salzer said. 

The expansion to secondary cities by investors and owners comes as industrial space in North America is experiencing a record-low vacancy of 3.8%, Salzer said. The supply of industrial space is expected to remain extremely tight through 2022 before ending 2023 at about 4.1% vacancy.

“We could easily see this breakneck pace of leasing continue as consumer spending gradually moderates but still remains above trend well into next year,” said Adrian Ponsen, CoStar's director of industrial market analytics, in a video presentation covering third-quarter 2021 data.

New supply trailed demand significantly in 2021, but in the next two years supply is expected to shift to outpacing demand. By year's end, Cushman & Wakefield projects, developers will have added 375.8 million square feet of industrial space to the inventory in North America.

Expected Increased Supply

In the next two years, new completions are anticipated to total 932 million square feet of industrial space. More than 94% of the new development will be in the United States, where the market has been strapped for quality industrial real estate in recent years.

The completions in North America have been held up by building material shortages, escalating land prices and more involved municipal approval processes, Salzer said.

The challenging approvals process has led to a constrained supply in Canada, which Cushman found has the highest rent in North America and lowest vacancy. By the end of 2023, Canada's overall net rent is expected to reach US$12.37 per square foot.

"Although the COVID-19 pandemic brought on new challenges for the industrial market, with port congestion, materials shortages, and commodity pricing skyrocketing, the market has and will continue to excel,” Salzer said.

Net asking rents in North America are expected to surpass 2021's average of US$7.62 per square foot and reach a new nominal high of US$8.72 per square foot by the end of 2023, Salzer said.

“While we’re seeing some of the pressure come off on the supply side, the truth is the industrial markets are red hot, and any kind of cooling will take substantial time," Salzer said. "Industrial will remain the most sought-after asset class for the foreseeable future.”