Adding to the Supply Chain Crunch: A Shortage of Industrial Warehousing Space
For months, headlines were filled with stories and images of long lines of containerships stuck out at sea. Port congestion was a major contributor to these well-publicized shipping delays—and true to the ripple-effect-nature of a global supply chain—there were many contributors that added to port congestion.
In its various iterations, a shortage of space has played a major role in the supply chain crunch—and when it comes to the demand for industrial warehousing space, a recent report indicates things may not be improving anytime soon.
In The Race for Industrial Space: Can Supply Keep Up?, real estate firm JLL described the current environment related to the availability of industrial warehouse space—as well as predictions for what companies might expect in the near future.
Here, we’ll provide an overview, along with a glimpse of JLL’s related report for Q1 of 2022.
The Race for Industrial Space
To create the report, JLL tapped into market intelligence from its nearly 60 markets across the U.S. and found that there “isn’t a lot of availability in the industrial market, and many tenants are being forced to expand or relocate to secondary and tertiary markets with vacancies at the lowest on record.”
From 2010 to 2021, JLL said there has been an 18 percent growth in supply, but a 24 percent growth in demand. Although the construction pipeline is “robust,” the firm said this supply-demand imbalance means that even the new projects slated for completion won’t adequately meet the need. Once again, the pandemic played a major role in widening the supply-demand gap.
“Prior to the pandemic, a steady flow of tenants taking occupancy and projects being delivered to meet demand kept vacancy rates stable,” report authors said. “However, in 2020 the pandemic shattered old consumer shopping habits, accelerating online shopping. This ultimately sent shock waves down the supply chain system and contributed to an increase in warehouse demand as tenants grappled with ways to prevent a future shortage of inventory. …Given the heightened demand experienced in 2020 and 2021 and the velocity at which it is going forward, we are starting to see the first wave of a supply crunch.”
JLL said there are various factors playing a role in these dynamics—including an aging inventory, changing tenant needs, and location, location, location.
A Rapidly-Aging Warehouse Inventory
Citing the impact of restrictions related to the pandemic and a “lull” in new deliveries, JLL described the industrial inventory as aging at an unprecedented rate.
Noting that the average age of industrial product in the U.S. is approximately 42 years old, the firm said facilities built more than 20 years ago—aka “older-generation” buildings—make up 75% of the total industrial inventory. Unfortunately, these sites don’t offer what their newer counterparts can provide, since they “typically have lower ceiling heights, fewer dock doors, limited trailer parking and larger footprints,” according to JLL.
Changing Needs of Industrial Tenants
The firm also said that over the past decade, the needs of tenants have changed “considerably” when it comes to how they use their warehouse space and the markets they want to do business in.
“Companies in industries such as e-commerce, 3PL and logistics and distribution have been leading the way with increased demand and utilization of modern facilities to attract labor as well as move goods in and out of the facility at a much faster rate than seen before,” JLL said. “These facilities are being built with higher ceiling heights to accommodate mezzanine structures and higher inventory stacking capabilities, providing amenities that are seen in office buildings in hopes of attracting and retaining talent.”
Same-day and next-day delivery strategies are also playing a role—which means that some businesses are ready to “pay just about anything” to make it a reality for key customers, JLL said.
Location a Priority
Such delivery aspirations are also causing industrial users to adapt to “older, smaller and less functionally sophisticated spaces,” since some urban centers have a dearth of more modern facilities.
“Demand for Class A space is at its peak, with almost 70% of the newly modernized inventory already preleased upon delivery,” JLL said. “Industrial users are willing to pay premium rents and will compromise on space quality if their business model requires them to be located within urban cores.”
Rent on the Rise
Since urban logistics markets are experiencing “near-zero” vacancy rates, JLL said rents continue an upward trend.
“In essence, there isn’t enough availability in the market for industrial tenants or developers, which has resulted in heightened competition and above-average rents,” according to the report. “Over the last five years, a competitive leasing environment has accelerated U.S. industrial rent growth by 37%.”
During the next 24 months, JLL predicts that this upward rent trend will continue as the delivery of new facilities is delayed and the gap between supply and demand persists.
In markets that are “severely strained,” JLL said developers are getting creative.
“The idea of converting underutilized retail, office and manufacturing sites to logistics use has been popular among many developers,” the firm said. “Additionally, we have seen a rise in the adoption of multistory development concepts to maximize space and revenue from each square foot of urban land.”
JLL categorizes such conversions into two broad categories:
Adaptive Reuse—of sites such as “distressed malls and big-box stores.”
Replacement—which is more common and involves “demolition and replacement of existing structures.”
In its conclusion, JLL offered the following predictions for the months ahead:
Heightened rent growth and record low vacancy on the horizon: “JLL Research forecasting models predict rents will increase by more than 8% across the entire base and could be accelerated by year-end. Given continuing tightening in the market, we anticipate vacancy rates will remain below the 4% threshold. …”
The imbalance of supply and demand will continue through 2023 and further exacerbate the race for space: “While there continues to be an influx of new deliveries hitting the overall market, development timelines across the country have increased and are expected to remain high. …”
Developers are turning to mega-box developments to achieve economies of scale: “Contrasting to urban logistics is the continuing growth of mega-box developments in key logistics markets outside the high-density areas. …”
Expect recycling of older industrial assets: “With many older buildings becoming functionally obsolete, over the next decade, these buildings will be torn down, recycled or rebuilt to be more efficient. …”
For more detail, please view the full report.
Additionally, JLL’s most recent data can be found in United States Q1 2022 Industrial Outlook. Here’s a snippet from the Executive Summary: “U.S. industrial fundamentals continue to break records. Despite a hearty influx of new deliveries, the national vacancy rate fell for the sixth consecutive quarter, from 3.8% to 3.4%. …The average asking rent climbed to $7.62 p.s.f., marking a 7% increase over the last quarter. This is the largest quarter-over-quarter increase since at least 2000. …”
And for a lender perspective, please check out the following SupplyChainBrain video, The State of the Warehouse and Industrial Real Estate Market. In it, Alex Cohen, CEO of Liberty SBF, discusses current trends and how companies are accessing financing to secure the space they need.