Where Demand for Industrial Space is Coming From Now
Originally published by GlobeSt
Logistics and parcel delivery remains No. 1 in million square feet requirements for industrial space but other industries have been making traction, according to a new report from JLL.
The report showed that the automotive industry has seen its demand increase by more than 156% since 2021 to serve an influx of electric vehicle and battery manufacturing endeavors across the country.
And demand for construction, machinery and materials companies grew by more than 41% this year because of the oversized pipeline of commercial and residential demand for housing.
JLL added that with companies reevaluating their existing operations and addressing the COVID-induced supply chain disruptions, demand will continue to increase for manufacturing and automotive users.
From a macro perspective, supply chain woes continue to create backlogs at the ports. The concept and practice of reshoring have come into play, and many occupiers have placed this at the forefront of their business operations.
Tight availability, high rents, and port congestion along the West Coast have pushed many occupiers to the Southeast region and to ports along the East Coast, such as Savannah and Charleston, which are seeing record TEU volumes.”
Industrial Outperforming Other Sectors
Meanwhile, investor interest in industrial continues to flourish. Northmarq’s Jeff Tracy, senior vice president, Tulsa, tells GlobeSt.com that while there has “obviously” been an impact on cap rates, “we continue to see the broad industrial sector perform well in relation to the other sectors.
“From an industry perspective, logistics and general light manufacturing continue to garner the most interest from buyers,” Tracy said. “Additionally, outdoor storage and assets that require quality outdoor yard space for operations are also popular amongst buyers at this point and seem to achieve the most aggressive pricing compared to other asset classes and sectors.”
Tracy added that the Midwest and Southeast are performing the best in relation to other locations around the country.
Robust Online Retail Sales Boosts Logistics Demand
Northmarq’s Rob Gemerchak, vice president, Toledo, tells GlobeSt.com that despite the challenges in the economy, there continues to be strong user demand across a range of industrial sectors, including logistics, technology, and manufacturing.
“Logistics demand is the strongest and is being driven by robust online retail sales and a national focus on supply chain efficiencies,” Gemerchak said.
“While the largest industrial markets such as Chicago, Dallas, Atlanta, New York, and Los Angeles continue to grow and thrive, there has also been tremendous growth in several notable markets such as Indianapolis, Kansas City, Phoenix, and Columbus.
“Looking towards the future, we expect that industrial demand and development will follow population growth in regions such as the Southeast and Southwest, as companies seek to locate near consumers and with strategic access to a growing employment base.”
Charleston, Savannah, Jacksonville E-Commerce Magnets
Avery Dorr, vice president at Stonemont Financial Group in Atlanta, tells GlobeSt.com that he’s seeing “a significant bump” in demand in port markets across the country, with the East Coast outpacing the West in recent years.
“The practice of reshoring is more important as supply chain woes continue to create backlogs at the ports,” according to the JLL report. “Tight availability, high rents, and port congestion along the West Coast have pushed many occupiers to the Southeast region.”
This year the Southeast region was the top market in terms of demand, accounting for 240 msf in requirements.
Dorr said that Charleston, Savannah, and Jacksonville have been magnets for e-commerce users and third-party logistics providers, and Stonemont continues to source out new speculative development opportunities in those markets.
“Florida and Texas have been at the top of our radar due to the tremendous population growth, deep labor pools, and overall business-friendly climates in both states,” Dorr said. “Investor appetite in these areas is particularly strong and we anticipate activity will remain healthy there in 2023 despite recent economic headwinds.”
High-Barrier, Major Urban Markets Should Thrive
Ryan Nelson, Managing Principal of Turnbridge Equities, tells GlobeSt.com that high-barrier-to-enter, major urban markets will see the greatest industrial growth in 2023.
“Businesses are striving to be as close as possible to the end user, and this has made urban markets with high population densities and land constraints a hotspot for last mile logistics,” Nelson said.
“Recently, Turnbridge topped out Bronx Logistics Center, the largest industrial development in the NY Metro Area, set to be complete in Q3 of 2023, which is one of a very limited number of new industrial projects that will be delivered in the market, given land scarcity, construction costs, and debt capital markets dislocation.”
Nelson said projects that will be delivered in 2023 will have been financed in the last cycle with the majority delivering pre-leased.
“New development starting in 2023 and delivering in 2024 or later will largely be limited to build to suit, as spec construction will be constrained by capital market dislocation,” he said.
3D Printing Shrinking Commercial Space Requirements
BKM Capital Partners’ CEO Brian Malliet, tells GlobeSt.com, “The small-bay, light industrial landscape has been transformed over the last decade and a half as tenant demand shifted towards dynamic growth industries such as e-commerce, technology & innovation, and advanced manufacturing.
“E-commerce demand has reshaped the supply chain, which has driven demand for industrial product to new levels,” Malliet said. “As consumers demand faster delivery times, retailers require well-located and highly functional light industrial warehouses to reduce transportation costs and meet customer needs.”
He said that new technologies are driving further use of chip capabilities, such as autonomous vehicles and robotics, that now utilize light industrial spaces for their operations since many of these spaces offer flexible zoning for multiple uses, including office, assembly, warehousing, and manufacturing.
Companies capitalizing on advanced manufacturing and 3D printing are also migrating toward smaller facilities, according to Malliet, with 3D printing allowing businesses to accomplish operations in just 10,000 square feet that would previously have needed five times the space.
Desire to Produce Goods Closer to Customers
HSA Commercial Real Estate recently broke ground on four speculative industrial warehouses totaling 1.9 million square feet along the Interstate 94 corridor between the Chicago and Milwaukee metros.
“We’re bullish on adding modern warehouse space along major logistics arteries,” Robert Smietana, vice chairman and CEO of HSA Commercial Real Estate, tells GlobeSt.com.
“Robust tenant demand for this space ranges from traditional retailers and e-commerce companies to third-party logistics firms, to manufacturers that are reshoring all or a portion of their operations. Across industries, there’s a desire to produce and store goods closer to customers as a means of mitigating future supply chain disruption.”
Logistics Firms Lessening Negative Impact of E-Commerce’s Pullback
Pedro Nino, vice president, head of Industrial Research and Strategy, Clarion Partners, tells GlobeSt.com that after some demand pulled forward in 2021, pushing net absorption to the highest levels on record, US industrial net absorption began normalizing in 2022.
“Despite some deceleration from e-commerce users, which accounted for most of the recent surge in” absorption, the industrial market still recorded its second-highest total for overall annual net absorption in 2022,” Nino said.
“This highlights the pent-up demand in the market as record low vacancies, limited supply, and an ultra-competitive leasing environment previously left some unfulfilled requirements on the sidelines.”
A combination of Clarion’s portfolio data, which includes more than 215 million sf and nearly 1,000 industrial properties across the US, as well as data from leading brokerage shops, show that third-party logistics firms and general retailers have sufficiently lessened the negative impact of an e-commerce leasing pullback.
“This makes sense as traditional retailers continue building out their modern/e-commerce distribution strategy, all while 3PLs offer comprehensive solutions, and ultimately, flexibility, in all things related to transportation and order fulfillment,” Nino said.
‘Even a Recession’ Won’t Stall E-Commerce Demand
Contrarily, CommercialEdge said that e-commerce growth will continue to drive high levels of demand in the industrial sector for the foreseeable future, but it will not reach 2020 levels again.
“New supply has yet to match demand, and even a potential recession is unlikely to cause e-commerce sales volume to fall.”
CommercialEdge said that in-place rents have grown the most in the Inland Empire (13.1%), Los Angeles (10.7%), and New Jersey (8.9%). The lowest rates of rent growth were found in Tampa (2.5%), St. Louis (2.6%), Memphis, and Houston (both 2.8%).
The national vacancy rate measured 3.8% in November, falling 20 basis points from October. Despite record levels of new supply delivered in 2022, the vacancy rate fell throughout the year.
In-demand markets in the inner portion of the country also have low vacancy rates, including Nashville (1.2%), Columbus (1.7%), Indianapolis (2.5), Kansas City (2.5%) and Phoenix (2.9%). The abundance of space available on the outskirts of these markets for new development keeps rent growth lower than what is being seen in most port markets.
When Amazon Slowed Its Network, Others Stepped Up
Adrian Ponsen, Director of U.S. Industrial Market Analytics, CoStar, tells GlobeSt.com that as supply chain bottlenecks eased in 2022, imports into the U.S. surged to record highs.
To help process this increased flow of goods, “third-party logistics companies stepped up and increased their overall leasing in 2022 relative to 2021, helping to compensate for the fact that Amazon slowed its distribution network expansion,” Ponsen said.
He said that building material and gardening supply retailers like Home Depot and Lowe’s, which are some of the largest U.S. industrial tenants, also accelerated their leasing in 2022, mainly to increase the speed and scale of their home delivery offerings.
Additionally, industrial leasing by retailers like Dollar General, Rite Aid, and Target also accelerated in 2022, as these companies sell day-to-day necessities that have remained in high demand even as households feel the pinch of inflation.
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January 20, 2023