The economy was thrust into unprecedented territory at the end of the first quarter with the onset of the COVID-19 pandemic, and the nation continues to grapple with the disruption and uncertainty. GDP fell at an annualized 4.8% pace in Q1 marking the sharpest downturn in the economy since the Great Recession in 2008-2009. Things are expected to get far worse in Q2, as statewide lockdowns have caused massive declines in economic activity and record job losses.
These economic developments are going to have some noticeable negative effects on industrial real estate trends over the next couple of quarters. Weaknesses in manufacturing and brick and mortar retailing are expected to spill over into industrial markets throughout the remainder of 2020, halting the sector’s momentum. Net absorption is projected to turn negative in Q2 and remain negative throughout 2020 before improving in Q1 of next year. The weakness in absorption is expected to cause a rise in the industrial availability rate over the next few quarters, peaking at 9.7% in Q1 of 2021 before declining. Weakening demand trends and rising availability are expected to push year-over-year rent inflation into negative territory starting in the second half of 2020. Rent growth is expected to bottom out at -1.9% in Q1 2021 before improving as the economy regains momentum.
The expected weakening within industrial would end a decade-long period of strength in the sector, marked by solid rent growth and historically low availability. However, given the magnitude of the impact of the COVID-19 pandemic to the macroeconomy, the effects on the industrial sector are less severe compared to other historical disruptions. The rise in vacancy and declines in absorption and rent expected in 2020 are milder than in each of the past two recessions, and nominal rents are projected to return to pre-crisis levels by the end of next year. This is partly because of the anticipated quick economic recovery, which should prevent more drastic moves in the industrial market.
Additionally, the industrial market should benefit in the short term as consumers shift more of their purchases online. Once the economy recovers, industrial real estate will find itself in a stronger position than we expected before the crisis hit and is expected to see solid rent growth in outer years.