Halfway through 2018, the state of the Greater Louisville industrial market is red hot, according to second-quarter statistics and analysis from Commercial Kentucky | Cushman Wakefield.
Consider just one example of many: W.W Grainger Inc., a Fortune 500 industrial supply company from the Chicago area, is building a 1.5 million-square-foot warehouse facility in the Renaissance South Business Park, off I-65 and near the airport.
But the most dramatic effect, according to Commercial Kentucky | Cushman Wakefield, is that “total second-quarter leasing activity of 3.3 million square feet set a record for the most leasing activity recorded in a single quarter.”
The previous record high was 2.9 million square feet, set in the fourth quarter of prerecession 2006.
New construction is flourishing
All of the activity is spurring new construction, as well. Only halfway through the year, the combination of completed and under construction speculative projects and built-to-suit projects promises to reach 6.5 million total new square footage, which would be a more-than-40 percent increase over 2017, and 30 percent better than the previous high-water mark of 5.03 million square feet in 2016.
Already completed this year are nearly 3.5 million square feet of construction, more than most entire years going back a decade.
That includes the already completed Grainger project; 895,900 of new space UPS built for itself; and more than a million square feet of developers’ speculative projects.
In addition, due to be completed by the end of the year is 1.1 million square feet in River Ridge for Medline Industries, a Northfield, Ill.-based international company that is the largest privately held manufacturer and distributor of medical supplies providing products, education and services in the country.
Also, Algood Food Co. of Louisville, a packager of private label foodstuffs, is building a 210,000-square-foot warehousing facility at Riverport. And there are 1.76 million square feet of speculative construction underway.
Leasing is flourishing
Industrial leasing activity, 4.375 million square feet through the first two quarters of 2018, is already 74 percent of the total leasing activity in all of 2017, and 68 percent of the decade’s best year in 2016.
The Grainger project had a lot to do with that. But it was far from isolated. Haier Group, a Chinese conglomerate that now owns GE Appliances, leased 305,760 square feet in the River Ridge Commerce Center across the river in Clark County. And Saddle Creek Logistics Services, offering third-party warehousing, transportation, omnichannel fulfillment and packaging services, is taking nearly 201,000 square feet in Bullitt County.
The strength of the Louisville industrial market has been going on for several years, as its position as a central transportation hub, especially including UPS World Port, and development of large industrial parks have invited large warehousing facilities — and, especially, e-commerce fulfillment.
The development of River Ridge, especially, from an Army ammunitions plant to more than six million acres of land, has spurred this growth. And there’s plenty of upside at River Ridge. About four million of the six million is still undeveloped.
With all the technology and logistical analytics that have to be built into a modern fulfillment center, it’s more practical to build something ground-up than to try retrofitting existing buildings. Amazon alone has 1.2 million square feet of space at River Ridge.
“It’s been a perfect storm,” says Commercial Kentucky broker Greg Charmoli. “An improving economy, rising demand and the completion of the East End bridge that better connects the entire area. It helps eliminate the bottlenecks on I-65 toward the airport and UPS for an industry critically dependent on meeting its shipping schedules.”
Absorption is flourishing
Another term the commercial and industrial real estate industry depends on is “net absorption” — the amount of vacant space that has been filled after factoring in the amount of occupied space that might have abandoned. High net absorption is what separates a robust market from one simply playing musical chairs.
So net absorption through the first half of 2018 was five million square feet, towering over 20 years of industrial activity on a bar graph. (The previous high was a little over four million square feet of net absorption in 2008.)
“By total square footage of the industrial sector, Greater Louisville is the 31st largest industrial market in the country,” says Commercial Kentucky broker Robert Walker. “But, year-to-date, our positive net absorption rate is the sixth highest of all U.S. markets.”
So the snapshot of the Louisville market is strong. But what does the overall future look like for the U.S. industrial real estate market?
Commercial Kentucky speculates that:
- Demand for U.S. industrial space is expected to remain strong, averaging 58.1 million square feet of absorption per quarter, tallying over 400 million square feet for the next two years.
- Growth in asking rents is expected to soften, but rents will continue to rise.
- Despite an active development pipeline, which is expected to peak in 2018, vacancy rates are not expected to rise by much.
- E-commerce will continue to drive industrial demand.