Strong consumer demand, dwindling land inventory, intensified two- and same-day shipping are pushing warehouse prices up
Industrial real estate prices for warehouses large and small are surging on the strength of consumer demand and intensified last mile shipping activity, as well as a diminishing supply of suitable sites, according to new research by CBRE. Rates for larger ‘first-mile’ sites, which stretch from 50 to 100 acres with warehouse space often exceeding 1M square feet, have more than doubled in the past year. Rates for smaller urban infill ‘last-mile’ sites, sized at 5 to 10 acres for warehouses under 200K square feet, are up more than 25% over twelve months.
Bill Mongelluzzo, senior editor at JOC.com, wrote, “In the best case scenario for 2018, industrial real estate developers anticipate another year of low vacancy rates, with demand at or slightly exceeding supply and continued mid-single-digit rent increases. A more moderate forecast calls for new supply to slightly exceed demand, which would mean more-moderate rent increases.”
Prologis, a leading industrial real estate investment trust, uses a proprietary survey it calls the Industrial Business Indicator (IBI) to gauge activity in industrial real estate. The IBI has climbed to more than 60, consistent with very strong growth in activity through customers’ warehouses, the highest reading since 2014. Lack of land and labor has constrained developers’ ability to respond to high prices and demand—Prologis said the construction pipeline has started to plateau.
“Last, customers are at capacity… We see and hear that growth is being constrained by a lack of available space. The IBI Utilization rate has remained near its peak of about 86%, signaling that logistics facilities are being run at capacity. Logistics real estate footprints want to grow. Looking ahead, Prologis Research expects balanced supply and demand, given the vacancy rate near its historic low of 4.6%. Consequently, the leasing environment in most U.S. markets should remain challenging for customers looking to expand,” said Chris Caton, Global Head of Research for Prologis.
Warehouse real estate demand has grown across sectors, including retail, transportation, and wholesale, and the demand growth has been distributed widely across the United States. CBRE reported that California’s Inland Empire experienced 35% Y-o-Y growth since Dec. 2016 in warehouse development land prices; Las Vegas saw 17% growth; Northern New Jersey saw 17% growth, Chicago saw 16% growth, and Atlanta and Houston both saw 14% growth.
“With the vacancy rate stabilizing at historic lows, customers should prepare well in advance for new requirements and expect rents to continue to rise,” Prologis stated. Jones Lang Lasalle (JLL) said U.S. industrial rents have already reached $5.40 per square foot, an all-time high, and rates rose at the end of 2017 in 79% of U.S. markets. Developers expect demand to hold in the mid-term as nearly 70% of buildings constructed in the last few quarters were built on a speculative basis. JLL has developed an industrial property clock (see image below) that illustrates where each market sits within its real estate cycle. Markets generally move clockwise around the dial, with markets on the left side of the dial facing more landlord-favorable environments:
Foreign investors, which were largely “sitting on the sidelines” in 2016, re-entered the US market last year, with Canadian and Chinese investors being the most active sources of foreign capital, JLL stated. Of note are the markets the foreign investors are targeting. “Once only targeting core markets, a shift in sophistication and savviness has spurred an increased focus on highly specialized, function-based [such as last-mile, infill, cold storage, etc.] portfolios,” JLL stated.
Buildings close to end consumers and those that can handle a high volume of goods will be most in demand in 2018, driven by three kinds of demand that fluctuate on different timescales. The first is daily consumption—products include things like food and beverages, fast-moving consumer goods, and apparel. Demand growth in daily consumption stems from population growth and supply chain modernization. Cyclical spending, which affects big-ticket consumption like housing, home goods, and automobiles, is linked to economic and consumer spending cycles. Finally, there’s structural change—the rapid growth of e-commerce and the aging American population, which now requires more distribution of medical equipment, devices, and supplies, are the two big stories here. At the moment, all three demand categories are overlapping to create a white-hot market for warehouse space.
Still, no one is calling the industrial real estate market in general or the warehousing market specifically a ‘bubble’. The economic fundamentals underlying 2017’s growth remain strong. Right now, Prologis finds outsized concentrations in logistics real estate in the goods consumption, autos, and housing sectors (housing includes residential construction, home goods, and appliances), all space-intensive sectors that should see a substantial upside if the GDP growth continues. If those sectors continue to do well, the rates for warehouse space—both in leases for square footage and development per-acre prices—will continue to gain strength.
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