Vacancy in industrial warehousing across the nation recently hit a 17-year low of just 5.3 percent, while rental prices are up by more than one-third from 2012 levels, leaving customers asking what the right mix of costs are for their supply chains.
Prices for industrial warehousing space have been on the rise across the United States over the past few years, while vacancy has declined, largely fueled by an improved economy and the booming e-commerce market.
Vacancy in industrial warehousing across the nation recently hit a 17-year low, standing at just 5.3 percent, according to logistics real estate firm JLL’s Industrial Outlook 2017 report.
“As companies continue to gobble up space, competition for the most optimal space remains fierce,” JLL said.
Compared to five years ago, rental prices are up by more than one-third, leaving customers asking themselves what the right mix of costs are for their supply chains, Chris Caton, senior vice president and global head of research at logistics real estate firm Prologis, said in a recent interview with American Shipper.
But the rise in rent prices is not a new phenomenon.
Mehtab Randhawa, vice president, Americas industrial research at JLL, told American Shipper prices have been growing at a gradual pace for seven years now, and a lot of that is due to new construction.
With few properties currently available to buy or lease, the industrial construction pipeline is growing, led by a significant increase in build-to-suit-properties, according to the JLL report.
Historic Lows. “Vacancies are at historic lows and in some markets, as low as 2 percent or less,” said Craig Meyer, president of JLL’s industrial group, Americas. “Coupled with broad rental growth in some markets as high as double digits year-over-year, 2017 is already shaping up to be another great year for industrial real estate. There is also an estimated 247 million square feet of new industrial space slated for delivery, a 10-year high.
“Cost-sensitive tenants in larger warehouse space with leases of five years or more are likely to experience sticker shock when their lease comes up for renewal,” he added. “We are encouraging our occupier clients to think about these leases much earlier and either renew or find expansion space to solve for the lack of alternatives.”
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During the first quarter of 2017, the top four U.S. markets with the highest year-over-year rent growth were Northern New Jersey, San Francisco mid-peninsula, Seattle, and the “Inland Empire,” located east of Los Angeles in Southern California, according to data from the report.
In New Jersey and the San Francisco mid-peninsula area, there has been an increasing number of industrial buildings being repurposed due to the lack of space and tight competition with other sectors like offices and housing.
Areas with the least amount vacant space continue to be the California markets of Los Angeles (0.9 percent vacancy), East Bay (1.2 percent vacancy), Orange County (1.5 percent vacancy), San Francisco mid-peninsula (2.5 percent vacancy); and Long Island on the U.S. East Coast (2.7 percent vacancy).
Meanwhile, industrial construction is at the highest levels in the Inland Empire, followed by Dallas/Fort Worth, Chicago, Atlanta and Philadelphia.
Caton said construction projects seem “a bit aggressive” in areas such as southern Dallas, Central Pennsylvania and Eastern California, but this is outweighed by other pockets across the nation where the land normally used for these types projects simply does not exist, namely in Southern California, Seattle and New York.
However, JLL said, “Oversupply continues to be a risk if there is any slowdown in future industrial demand.”
Improving Economy. Just before the Great Recession struck the nation in 2008, industrial real estate utilization was on the rise, there was some building that was happening, and e-commerce was already growing, but not nearly at the rate it is today, Karl Siebrecht, co-founder and chief executive officer of Flexe, which connects companies in need of short-term inventory storage with empty warehousing space, told American Shipper.
Once the recession hit, construction halted and utilization went down, creating a drop-off in capacity.
As the economy began to improve, e-commerce started to grow faster than ever, and since warehouses can’t just be built overnight, the nation is now facing a shortage in industrial and logistics-related warehousing space, Siebrecht explained.
Even without the e-commerce boom, industrial warehousing is a very cyclical business, since the assets are so fixed.
With the economy on its way up, certain categories in particular are in “growth mode,” such as automobile sales, Caton said. Housing and construction has also recently begun to pick up steam in 2016 and 2017, including purchases in home goods and appliances.
And this time around, the industry has been a little more disciplined about development, Caton said.
Although growth in industrial warehousing rental prices has returned with the improved economy, logistics real estate is not a highly desired use for land, due to the congestion and noise it can lead to, so it takes a lot of work to get projects approved and permitted, especially when there are other land uses that could generate more taxes, Caton explained.
The cost of building industrial warehousing space has also increased, and is now one of the most expensive types of buildings to construct in the U.S.
In addition, Caton said that with unemployment below 5 percent, it is difficult to employ workers to construct these buildings, and prices for basic materials like steel and concrete are going up in local markets.
E-Commerce Effect. One of the primary forces behind the strengthening of the industrial real estate market is the shifting patterns of consumers away from traditional brick-and-mortar stores and towards online shopping.
“The logistics and distribution and third-party logistics (3PL) sectors that serve many retailers and e-commerce companies represented 24 percent of total leasing activity in the first quarter of 2017,” JLL said in its report.
Broken down by specific sectors, food and beverage reported the highest number of new-to-market lease transactions during the quarter.
“Growing demand for ready-to-eat meals and food subscription services is driving leasing activity as these services seek space to expand operations and locate close to their customers,” according to JLL.
Although e-commerce has been the primary driver in the shortage of industrial warehousing space, it’s really an omni-channel situation, said Matt Powers, executive vice president at JLL.
He explained that while retailers that only or primarily have brick-and-mortar stores are looking to establish or increase their e-commerce presence, many e-commerce businesses are also looking to expand their footprint by adding brick-and-mortar stores.
If companies stay within the walls of the traditional brick-and-mortar model, they will fall behind, Powers said, as evidenced by the many store closures and bankruptcies seen throughout the retail sector in the past 18 months or so.
Looking ahead, Siebrecht said it is not a matter of “if” the economy will slow back down again, but rather a matter of “when” the economy will slow back down again, which will increase vacancy rates and bring down rental prices.
Both Randhawa and Powers said they do not expect the warehousing shortage to get any worse, but Powers does believe there will be a steady pace in warehousing occupancy growth.
As far as what companies can do to combat the current shortage, Randhawa said they can be more creative with their space needs, by stacking goods up higher, for example, or using data analysis to figure out how exactly much product they need to store at any given time.
Caton said companies need to plan earlier to secure space. Handing the real estate side of operations is difficult for organizations whose expertise lies elsewhere, but those that plan earlier have the best chance at securing the space they need.
At the same time, Meyer noted, “While demand remains strong, there is an underlying mood of uncertainty stemming from an unpredictable political climate. Business leaders have not yet hedged on capital budgeting and there is more discussion around caution than market conditions reflect.”