The industrial real estate warehouse market set an all-time record for leases in 2021 and is poised to carry on this boom due to what is hoped to be continued post-pandemic economic growth, ongoing e-commerce growth and supply chain disruptions that have companies looking to build safety stocks.
Both private and third-party logistics (3PL) warehouses and distribution centers (DCs) are contained in the IRE subcategory of Industrial & Logistics (I&L), analyzed recently by the CBRE Group, the world’s largest commercial real estate services and investment firm, which started keeping track of these numbers in 1989.
It said leasing activity in 2021 recorded more than 1 billion square feet of transactions, and the surging activity drove vacancy down to 3.2%, the lowest on record. With space incredibly tight, asking rental rates shot to $9.10, up 11% year-over-year and a new high.
“As retailers require more safety stock and e-commerce continues to expand, more space is needed. All signs point to the same demand continuing in 2022,” said John Morris, executive managing director and leader of the company’s Americas I&L business.
He added, “Demand for industrial space remains at an all-time high. Space remains historically tight, but we still have just enough product to keep pace with demand. Occupiers are in a highly competitive market and space for deals this size are becoming few and far between, likely to result in growth markets becoming even more popular in 2022.”
On a net basis, the market registered positive absorption of 432 million square feet, an 81% increase from 2020 totals. Last year’s net absorption outpaced the previous record in 2016 by 50 million sq. ft. (Net absorption measures total leasing activity—that 1 billion sq. ft.—measured against the amount of space newly vacated in that period.)
The top concern for occupiers in 2022 will be rising transportation costs and supply chain delays, CBRE believes. While the cost to ship goods via ocean freight reportedly jumped more than 200% in 2021, the cost for domestic freight increased over 40%.
Those increases may ease as 2022 unfolds, but transportation costs will likely remain elevated for the foreseeable future. Manufacturers have not yet reached full capacity amid pandemic-related shutdowns, and it is believed that it will likely take them until 2023 to fully recover.
Over this year demand for goods is seen continuing its rise, leading to increased competition and higher costs. Transportation costs make up 40%-70% of a company’s total logistics spend, while fixed facility costs, which include rent, make up only 3%-6%, according to CBRE’s Supply Chain Advisory.
“While rents will continue to rise significantly, it will pale in comparison to rising transportation costs,” the company said. “Therefore, companies will continue to lease more space to cut down on transportation costs.”
The construction pipeline is robust, with a record 513.9 million sq. ft. of projects under construction at year end, 200 million sq. ft. higher than this time last year, CBRE pointed out. However, construction completions were down 10.3% year-over-year as supply chain issues have hampered the construction timeline for many projects due to a scarcity of materials.
Can’t Build Fast Enough
“We will need to see significant construction completions this year to accommodate all of this activity,” Morris predicted. “Developers will likely take on more construction and materials costs to keep pace with demand, but space will remain very tight and rents will likely continue to rise at considerable rates.”
This pressure was most visible in the to 10 I&L markets, CBRE noted. Companies committed to 57 warehouse leases of 1-million-square-feet (MSF) or larger across the United States in 2021, a 19% increase from 2020, CBRE reported. It charted the increase in mega warehouse leases as part of its analysis of the 100 largest U.S. industrial & logistics leases of 2021.
The industry sector claiming the largest share of those 100 leases is general retail and wholesale, which recorded 44 transactions (46.1 MSF). This was a significant jump from 2020 when that sector recorded 32 transactions (35 MSF). E-commerce-only occupiers, last year’s leader, were second at 21 deals (27 MSF), followed by food and beverage users at 15 deals (14.2 MSF).
By market, Chicago had the greatest number of the top 100 transactions with 12 of them that totaled 12 MSF. The Pennsylvania I-78/81 corridor followed with 11 but recorded the most transacted square feet at 12.4 million.
California’s Inland Empire boasted 10 large transactions involving 10.2 MSF, although fulfillment center construction is feeling pressure from environmental activists on the Los Angeles side of that territory, which already caused one large project to be cancelled recently.
Greenville-Spartanburg, SC, a fast-growing market in the Southeast, made the top 10 for the first time. “It’s notable to see Greenville-Spartanburg on this list,” said James Breeze, global head of I&L research for CBRE. “As core markets continue to struggle with availability, growth markets will begin to see larger deals as occupiers look to address their space needs.”
The company also predicts that 3PL warehouse operations will continue to thrive, which will push up rents. 3PLs led industrial leasing activity in 2021 with a market share of 30%, compared with 13% for e-commerce. “3PLs will expand further in 2022 as companies look to reduce direct logistics costs and avoid the hassle of finding space in record tight markets with limited labor availability,” according to CBRE.
“As a result, 3PLs’ market share will increase in most U.S. markets as vacancy rates decline, rents increase and labor markets further tighten, leading to a projected leasing market share of 35% by year’s end,” CBRE observed. In spite of this, 3PLs will need to overcome labor shortages, leading to the greater deployment of automation and other technologies to lower the reliance on human labor.
As manufacturing companies look to onshore more of their operations, the manufacturing side of IRE will be under pressure because of positive net absorption, lower vacancy rates and record-high rents. This trend will be led by technology, defense, automobile and medical manufacturing companies.
While demand for manufacturing facilities will increase in traditional Midwest and Southeast markets, CBRE said that Arizona, Texas and Florida are expected to be the top growth markets largely because of growing populations, available land and business incentives.
Another trend that will impact IRE is the mounting pressure brought by environmental, social and governance (ESG) initiatives, the company explains. Given the need to reduce carbon emissions, the industrial sector will face more regulatory pressure, particularly in regard to growing demands for energy efficiency.
“While much of this effort will likely be focused on improving passenger and freight transportation efficiency and reducing manufacturing emissions, warehousing may be impacted as well,” CBRE said. “Consequently, developers may use more sustainable construction materials like timber instead of concrete and steel.”
