There was never anything glitzy or attractive about nondescript buildings with big rigs rambling into driveways and loading docks—that is, until now.
“It’s insane,” said Rich Thompson, international director of supply chain & logistics at real estate firm JLL. “It used to be where you’d make your supply chain decisions and say, ‘OK, now go get me a warehouse.’ Executing wasn’t that difficult. You’d get the distribution center leased and hire some people and you’re done. Today, you can’t do it.”
Rents for industrial real estate ended the year averaging $7.11 per square foot, up 11.3 percent year-over-year, according to JLL’s fourth-quarter industrial outlook released last week.
How these spaces are being used among the lessees has also evolved over the past few years, where demand is not just coming from e-commerce. Instead, it’s being driven by large shifts in companies’ fulfillment and delivery strategies.
“The consumer trends that accelerated industrial demand growth in 2020—strong spending on goods and increased adoption of online shopping—continued to shape the market throughout 2021. However, demand has diversified beyond the big e-commerce players that dominated the market in 2020,” JLL’s report said.
Companies inking industrial leases for logistics and distribution purposes notched the largest increase in activity from 2019 to 2021, with lease deals up 46 percent, according to JLL. Third-party logistics providers recorded the next largest gain in leasing activity between 2019 and 2021 of 41 percent.
Industrial acquisitions also climbed to a record $143 billion in 2021 sales, up 32 percent from the previous high set in 2019. As the options in Class A industrial real estate dwindle, buyers are keeping an open mind on what defines attractive properties anymore.
“As more dry powder continues to target the sector, a constrained supply pipeline will make it challenging for investors to find these blue-chip assets. As a result, demand for Class B assets is likely to rise,” JLL projected.
A more open mind on what makes good real estate has also spurred growth of secondary and even tertiary real estate markets, JLL’s Thompson pointed out.
Large markets in the past dominated real estate deals. Chicago, New York, New Jersey, Atlanta, Dallas and Los Angeles were the automatic choices. It’s different now.
“Nobody ever thought about Denver or San Antonio or Charlotte,” Thompson said. “Nobody thought about the secondary markets. Even Phoenix now is insanely crazy because people are trying to get out of the Inland Empire and the expense there.”
The Inland Empire, a region east of Los Angeles that includes cities in parts of Riverside and San Bernardino counties, is currently the hardest market to get into with the lowest amount of available space in the country. Other markets with low availability rounding out the top five include New Jersey, Los Angeles, Hampton Roads in southeast Virginia and New York City.
The Inland Empire also saw the greatest quarter-over-quarter rent increases to end the year at 99 cents per square foot, with warehouse and distribution space in the region averaging $1 per square foot.
“E-commerce and the growth of e-commerce [are] really driving the demand for industrial real estate and obviously that spiked during COVID and everybody’s aware of that. The adoption rates for people that weren’t using that grew as well as it accelerated across the board. There’s still a lot of runway for growth of e-commerce,” Thompson said.
That translates into two implications for industrial real estate activity. For starters, more space is required to handle more workers picking and packing orders and to accommodate all the stock-keeping units.
The other aspect boils down to what Thompson described as the Amazon effect.
“Amazon created this customer perception that you’ve got to have everything in two days. So, the Prime service got everybody thinking ‘Wow, I’ve got to get product in two days.’ That created a domino effect on all other companies to say ‘Wow, we’ve got to be able to deliver in two days.’ What that drives is the need for more facilities closer to your customer.”
As retailer and apparel manufacturer supply chains undergo dramatic shifts in response to the accelerated rate of change in consumer shopping habits over the past two years, finding leasable real estate is becoming a bigger problem for space-strapped companies.
Hamid Moghadam, chair and CEO of Prologis Inc. succinctly summed up the situation when he said late last year the company is “effectively sold out” of space. Prologis, the largest owner and developer of industrial real estate, has a portfolio of about one billion square feet across 19 countries.
“People simply cannot get the space that they need,” Moghadam told investors last month during the company’s quarterly update call.
In the U.S. there’s no inventory that would make the supply chain issues go away either, the CEO went on to say, projecting it’s likely to take multiple years for all of the challenges—from the container build-up at the ports, to the truck driver shortage—to resolve.
For industrial real estate, the building materials shortage, limited land to build and zoning restrictions specifically targeting industrial development are making it difficult to predict if more development would soften the supply constraints.
“That’s the big question,” Thompson said. “You can’t come online [with completed projects] fast enough at this point.”