El Paso market poster child for bullish US industrial outlook, CBRE says

The outlook for the Southeast and Southwest markets was one of the bullish narratives in a very positive 2021 forecast for U.S. industrial real estate. Any thoughts leaving 2019 about a slowdown in the decade-long bull market for industrial property have been tabled, perhaps for years, by the COVID-19 pandemic and the country’s collective response to it. E-commerce activity has soared due to store closings and health concerns over congregating in crowded brick-and-mortar environments. This trend, which many experts believe has secular legs, has sent delivery and warehouse utilization levels rocketing higher. 

Warehouse demand will be further enhanced fueled by a greater emphasis on inventory control and local product sourcing and less on the intercontinental “just-in-time” distribution formula that eschews inventories in favor of fast-cycle deliveries to end markets. Importers spooked by the continuing inventory dislocations due to the pandemic are expected to increase on-hand inventories to a 60-day supply from current stocking levels of 15 days, CBRE said.

Nearly 250 million square feet of industrial space will be absorbed in 2021, higher than the prior five-year annual average of 211 million square feet, CBRE said. Asking rents will climb by 5% to 6% next year as demand continues to exceed supply, the report forecast. Construction completions will rise by 29% over 2020 levels, the firm projected.

Red-hot markets like Savannah, Georgia, home to what has become arguably the nation’s most successful port industrial complex, are expected to continue to attract sizable distribution business for years to come. Warehouse vacancy rates at Savannah currently stand at 2.4%, down from 3.5% at the end of the second quarter, according to data from Cushman & Wakefield, a real estate services firm. 

About 8.7 million square feet are currently under construction around the port complex, while an additional 130 million square feet within 30 miles of the port is eligible to be developed, according to Cushman & Wakefield data.

Pacific Cycle Corp., the American division of Canadian bicycle importer and distributor Dorel Industries, with brands that include Schwinn, Mongoose and KidTrax, will occupy more than 1 million square feet of distribution space near Savannah starting in January, according to an announcement Thursday from Stonemont Financial Group, an Atlanta-based real estate investment firm that developed the property on a partially speculative basis. Speculative development, where land is acquired or a project launched without any formal end-user commitments, is generally a sign of high confidence in a market’s prospects.

E-commerce demand will change the design features for warehouses, CBRE said. Buildings of more than 3 million square feet, with 40-foot ceiling heights and multiple mezzanine floors, will become the rule rather than the exception in the years ahead, the firm said. In the short term, such mammoth projects will be customized — known in real estate lingo as “build to suit” — to meet the specific needs of large tenants. 

Future warehouses will also be more environmentally conscious and tech-centric, with occupiers demanding access to renewable energy sources, according to the report. More warehouses will be built with HVAC systems for employee comfort and to keep energy-gobbling machinery at optimal operating temperatures, the report said. Power requirements will escalate as more automated picking-and-sorting technologies like robotics become commonplace, CBRE said.

The market for older properties such as shopping malls being converted to industrial use, a trend expected to gather steam as mall traffic continues to fall, will accelerate in 2021, CBRE said. It did not quantify the increase, however.

The latest example of this conversion came Tuesday, when Amazon.com Inc. (NASDAQ:AMZN) opened a 640,000-square-foot distribution center on the site of the former Rolling Acres Mall in Akron, Ohio. The mall opened in 1975 during the heyday of the shopping center model. However, it closed in 2008.