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Demand for Industrial and Logistics Space Shows Signs of Leveling Off

E-commerce’s rise to prominence has spurred massive consumer demand—and for brands and retailers attempting to meet those expectations, space for storage and logistics is of optimal importance.

In a report released last week, Los Angeles-based real estate firm CBRE detailed a slight shift in the availability of industrial and logistics real estate. Though available space has been steadily declining since 2009, the trend may be showing signs of leveling out.

The firm’s latest data shows availability has remained consistent from Q1 through Q2 of this year, hovering at 7.1 percent. Even a short period of stagnation is significant, according to CBRE’s global chief economist and head of Americas research, Professor Richard Barkham.

“It’s one of the stories of this economic and real estate cycle: just how incredibly much the industrial and logistics space has changed, and faced almost unprecedented levels of demand for space,” Barkham said. Logistics operators and supply chain managers have long sought to support the explosive growth of e-commerce and omni-channel retail with new distribution systems, and the real estate sector has experienced “sustained demand” for quite a while.

“The pattern is to have a hub and spoke model,” Barkham said, explaining that companies will establish a “big box on the urban fringes” to house large quantities of goods, and establish last mile delivery centers closer to major population centers so they can deliver as quickly as possible.

The supply of completed industrial and logistics space has increased year over year in a bid to keep up, Barkham said. But with such high demand from new and growing businesses over the past decade, availability has remained scant. Over the past two quarters, however, availability has started to align with that demand, with vacancies reaching a healthy rate of 4.3 percent.

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“These are only really small movements at this stage, but we are seeing mildly less demand for the bigger box units,” Barkham said. “I think it has to do with the fact that logistics operators have built out their platforms for the time being, while the development pipeline has continued to deliver new stock.”

Barkham clarified that the market is still tight, particularly for last mile facilities. Guaranteeing easy access to consumers also means these facilities are built in areas where there is a lot of demand for space, from office spaces to residential use.

According to Barkham, companies are looking increasingly to vertical, multi-story logistics centers, which was once considered very unusual. But it’s the price they must pay to be near “the big population centers where there is sustained demand for goods from e-commerce,” he said. With the demand for space, rent has increased to an average of $7.50 per square foot— the highest level CBRE has recorded since it began tracking the metric in 1989.

As the demand for space aligns more closely with supply, Barkham believes the logistics market will pivot by slowing down the build-out of new real estate stock.

“If you’re building a mall, which takes three years to build, you can’t stop building that mall if demand eases off,” he explained. In the case of industrial logistics, however, it takes about six months to build out a space. The market is much more responsive, Barkham said, and developers are already sensing lessening demand for certain types of facilities.

“Demand and supply are in balance right now at quite a high level,” he explained. “This isn’t a market slump—it’s not demand or supply slackening, it’s the fact that the amount of completion of new space is broadly in line with the net amount that companies are wanting to lease. The overall percentage of stock that is vacant is stable.”

The situation has those in the logistics and real estate sectors breathing a tentative sigh of relief.

“For us in real estate, it’s been a blisteringly hot ride of the occupier side and the investor side over the past ten years,” Barkham said. “Now we’re seeing the market coming back into balance, offering a mild degree of comfort for logistics operators who are seeking to continue to build out their platforms.”