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3PL Warehouses Lead Big-Box Builds

Sept. 22, 2023
But rate of future growth is in doubt, according to CBRE.

Third-party logistics providers (3PLs) leased more big-box warehouse space (defined as 200,000 square feet or larger) in North America last year than any other occupier category, according to a new report issued by the industrial real estate services firm CBRE.

Accounting for 41% of all big-box lease transactions in 2022, CBRE said that in the second quarter 3PLs expanded their footprints and claimed the largest share for the first time since CBRE began tracking such activity in 2012. (CBRE defines 3PL warehouse operations as companies that typically operate logistics and warehousing operations on a contractual basis, handling that work for multiple clients.)

As a result of what it believes are enduring pandemic-era shifts in economic activity, CBRE said that many companies have expanded their reliance on 3PL partners in an effort to create resilient supply chains and economically address customer needs. The COVID-19 pandemic spurred moving in this direction following a series of nationwide supply chain failures regarding everything from baby formula to toilet paper.

Following the rise of 3PLs to the top of the list of big-box warehouse users, sliding to No. 2 was the previous industrial category leader in big-box leasing activity—retailers and wholesalers—accounting for 35.8% of the leasing share. Food and beverage occupiers came in at a distant third, accounting for 8.7% of leasing activity.

“During the pandemic, companies relied on partnerships with 3PLs to stabilize their operations and accommodate demand,” said John Morris, CBRE’s president of Americas Industrial and Logistics business. “The initial thought was that companies would eventually return to self-reliance for their fulfillment needs, but more companies have since realized that 3PLs can play a vital role in their business models, and demand is stronger than ever.”

CBRE said that it chose to analyze warehouses of 200,000 square feet and larger because warehouses of that size are being used for large-scale national and international product distribution. Examining activities in the United States, Mexico and Canada, the big-box report found that industrial facilities enjoyed record-low vacancy rates and unprecedented rent growth in 2022, in spite of the record new deliveries of newly constructed projects.

The company also stressed that increasing demand for larger spaces had been driven primarily by a desire to serve markets with growing populations, as well as the need to modernize space for automation and improve supply chain resilience.

Matching 2021’s record low, the 2022 direct vacancy rate was 3.3% at year’s end, which the company said supported first-year base rents growth of 23% year-over-year. With demand for space at a high, and little space available, CBRE pointed out that a record 455 million square feet is currently under construction, of which 25.3% is pre-leased.

“Slower demand at a time of robust construction will result in higher vacancy as time goes on. That will provide relief for occupiers looking for space in a very tight market,” Morris explained. “New construction will moderate this year, particularly with the financing market so tight. This should lead to double-digit rent growth as construction deliveries slows.”

CBRE said it expects lease transaction volume to further decline this year, as the post-peak pandemic leasing rush wanes and some tenants decide to wait for more macroeconomic certainty. Lower leasing activity at a time of high development completions will result in some vacancy increases, but double-digit rent growth will remain.

“While a record level of product is under construction, highly constrained construction financing will reduce ground-breakings by over 50% in 2023,” the report stated. “As a result, the second half of 2024 and first half of 2025 will see significant reduction in new construction deliveries, keeping vacancies low and sustaining double-digit rent growth.”

The CBRE report examined the 25 largest big-box markets in North America. Four of these markets had recorded vacancies of less than 1%—Inland Empire (0.1%), Los Angeles County (0.6%), Toronto (0.8%) and Savannah, GA (0.9%).

The top 10 markets identified by CBRE were, in order of their ranking:

1. Inland Empire, 46.7 million square feet

2. Dallas-Fort Worth, 34.4 million

3. Chicago, 33.5 million

4. Southern N.J./Eastern Pennsylvania, 32.6 million

5. Atlanta, 27.6 million

6. Houston, 19.1 million

7. Northern/Central NJ, 18.8 million

8. Phoenix, 16.4 million

9. Indianapolis, 15.2 million

10. Columbus, Ohio, 14.9 million.

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