The industrial sector maintained its strong momentum in the second quarter of 2021. Rising vaccination rates and additional stimulus measures spurred a huge increase in consumer spending. Although brick-and-mortar retail location captured much of that windfall, consumers are still turning to e-commerce for an increasingly larger share of their shopping needs, spurring continued warehouse demand. Employee occupancy in industrial buildings has remained higher than in other property types throughout the pandemic. Many industrial employees are essential workers, while social distancing is easier to practice given the higher square footage per employee compared with office or retail. While Amazon dominated the leasing market in 2020, a more varied tenant pool has emerged in 2021, which bodes well for the market going forward.
Mirroring these national trends, occupancies and rents in the Boston Industrial Market remain near record highs. Leasing activity continued its strong pace in the second quarter, bringing annual net absorption past 2.5 million square feet. Warehouse vacancy continued its downward compression and finished the quarter at the lowest level on record, at about 3%. Flex demand was also positive for the second consecutive quarter, pushing its annual net absorption numbers into the green. Warehouse development has increased, as strong rent growth has enticed developers to move forward on projects. The investment sales market has boomed, with transaction volume jumping from about $900 million in the first quarter, to closer to $1.5 billion in the second quarter.
Given that e-commerce companies rank among the largest drivers of industrial demand, online sales numbers bode watching. E-commerce sales grew at a 10%-15% annual rate in the decade prior to the pandemic, before exploding to more than twice that rate in the initial months of COVID. This growth rate has slowed since the second half of 2020, but remains well above pre-pandemic levels. It remains unclear how much further e-commerce sales will grow as the country emerges from this crisis. Even if the growth rate reverts to its 2010-19 levels, demand should be good, with much stronger potential if sales maintain pandemic-era momentum.