Overall, the North American big-box market is riding a wave set by strong fundamentals in 2016, a year that saw all-time records in every statistic tracked. While this pace of activity seemed impossible to sustain, leasing activity and net absorption for the first half of 2017 are near the pace of the same period in 2016.
Activity continues to be dominated by Amazon.com, which leased five buildings totaling 4.1 million square feet during the first half of 2017 in the 14 markets highlighted in this report. Big-box vacancy rates finished midyear 2017 at an all-time low of 6.2%, while asking rents and under-construction product levels rose to new all-time highs.
On the investment side, capitalization rates remained at a record-low 5% in the first half of the year. While demand for big-box product remains strong in core markets, the decreased amount of product to purchase in these markets has pushed investors into secondary markets, where fundamentals are improving.
There are headwinds to look out for in the second half of the year, however, including an increase in demand for smaller warehouses close to urban centers that might reduce big-box demand. This trend of “lean warehousing” is on the rise as occupiers lease multiple buildings of 50,000 square feet to 200,000 square feet in order to focus on particular products and increase delivery speed to the end consumer.
This shift could ultimately lower demand for big-box buildings, particularly those under 750,000 square feet — though demand for this product remains robust for now. In addition, an overall shortage of big-box supply in Toronto and the West Coast and Northeast regions of the United States — where vacancy rates were under 5% in the first half of 2017 — could reduce leasing activity in the coming quarters.
Yet the big-box sector 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 ports throughout North America continue to post growing inbound container volumes. These drivers should outweigh the headwinds and create strong demand and rental rate growth in big-box markets for the foreseeable future.