Industrial commercial real estate assets traded to the tune of nearly $96 billion in the United States in 2020, the second-best year on record, and the outlook for 2021 already looks bright, according to a new report from JLL Capital Markets.
With increased competition among investors for industrial product, JLL Capital Markets said it has found one sub-class that is gaining big interest–multi-use logistics, which are typically older multi-tenant assets with solid footprints within infill urban logistics markets that boast compelling rent growth profiles.
The report noted that the rise of e-commerce and direct-to-consumer retail supply chain’s need for industrial space close to population density has largely driven the clamor for more industrial space, leading to the expansion of overall industrial inventory attempting to keep up with such rampant demand.
Several mid- and long-term effects that the coronavirus pandemic will have on the U.S. economy are likely to catalyze secular shifts that had already been occurring and largely benefit the industrial sector, the report said. Due to the restrictive nature of multi-use logistics assets in terms of development, and the increasing demand for smaller spaces within urban corridors for last-mile fulfillment, developers are finding it nearly impossible to keep up with demand, and thus competition and rent growth are affecting the sub-sector.
“The long-term outlook for multi-use logistics is strong, with clear industry momentum from ‘fabric of society’ tenants and growing investor demand for this sub-class,” said John Huguenard, senior managing director and co-head of JLL’s Industrial Capital Markets group. “With new yield-focused investors entering into the industrial space, small bay product is desirable as an alternative to the ever-tightening bulk industrial market.”
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In the report, JLL Research defines multi-use logistics assets as 20,000-to-100,000-square-foot multi-tenant industrial buildings in dense, infill locations around the U.S. These buildings often contain spaces for distribution, flex showrooms, industrial showrooms, research and development, warehouses, or manufacturing, and have a diversified, local tenant base.
Complicated by industry fundamentals and macroeconomic factors such as reshoring and rapid e-commerce adoption, the increased demand for these smaller, multi-tenant industrial assets has significantly dropped vacancy rates nationwide, now holding at under 9 percent, JLL said.
“This sub-class has huge potential upside on rent growth driven by low vacancy and limited new supply,” Huguenard said. “Multi-use logistics rent has grown more than 54 percent since 2010 and nearly 21 percent since 2017, outpacing the national average for the broader industrial market.”
JLL anticipates a nationwide 4.6 percent rent growth for triple-net-leased multi-use logistics between 2021 and 2024 compared to 3.8 percent for all U.S. multi-tenant industrial and 3.7 percent for the entire property sector. But the sub-class accounts for only 15 percent of overall industrial product inventory.
Adding to the advantages are a limited supply and lack of new construction. Construction activity for multi-use logistics properties is hovering between 0.1 and 0.3 percent of existing inventory this cycle, which is significantly below the national average of 1.6 percent, the report noted. With little new product entering the market and increasing pressure from rising land-values to redevelop for other uses, tenants have limited options outside their current space, helping constrain vacancy nationwide.
JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm has more than 3,700 capital markets specialists worldwide, with offices in nearly 50 countries.