In separate reports, commercial brokerage firms Transwestern and JLL each predicted that the industrial real estate and the logistics sectors will continue to outperform other real estate markets in the United States.
The U.S. industrial market continues to prosper during the pandemic, posting 102.2 million square feet of positive net absorption during the second quarter of 2021, the third consecutive quarter occupancy growth exceeded 100 million square feet, according to Transwestern’s recently released second quarter U.S. industrial market report. Markets leading net absorption both in the second quarter and year over year include Atlanta, Chicago, Dallas-Fort Worth and the Inland Empire.
Additionally, the national vacancy rate dropped to 5.2%, its lowest level since the start of the pandemic, helping to drive average rent up to $6.96-per-square-foot. At midyear, seven out of 44 markets saw vacancy below 4%, including Greensboro, Inland Empire (a section of Southern California), Los Angeles, Nashville, New Jersey, Orange County (California), Raleigh-Durham and San Jose-Silicon Valley.
“The industrial sector is once again firing on all cylinders, making it increasingly difficult to find suitable space in prime industrial markets,” said Matt Dolly, Research Director at Transwestern. “High rents and supply chain issues are making secondary logistics markets increasingly attractive to occupiers and investors, and we’re closely following markets such as Savannah, Las Vegas, Charleston, Phoenix and San Antonio, all of which have experienced expansionary conditions over a three-year period.”
While new inventory delivered to the market during the second quarter was at its lowest level in more than two years, the 573.7 million square feet currently under construction was 30% higher year-over-year and double that of year-end 2015. Dallas-Fort Worth, Inland Empire (part of California), Atlanta, Phoenix, Chicago and Philadelphia all have more than 20 million square feet underway.
The second quarter saw a slight decrease in the unemployment rate, down to 5.9%, as employers added 1.6 million jobs. However, industrial-using employment was virtually unscathed as supply chain challenges adversely affected manufacturing and construction.
Transwestern’s Dolly said, “E-commerce’s share of overall retail sales growth cooled in the second quarter due to the reopening of brick-and-mortar stores, but we expect retailers and food and beverage companies to continue investing in e-commerce, further fueling industrial demand.”
JLL’s new research entitled, “The Future of Global Logistics Real Estate,” predicts that demand for logistics space (warehousing and distribution facilities) will continue to intensify over the next three years, even when compared with recent elevated levels. To sustain this growth, however, both limited land supplies and increased pressure for environmental sustainability practices need to be addressed.
The e-commerce sector will increase most significantly but strong growth for warehouse and distribution facilities is also forecasted from express and parcel delivery; third-party logistics; healthcare and life sciences; and construction and materials, according to the JLL report.
The findings were based on a survey of 720 logistics experts in 43 countries and territories on a range of issues that could affect future occupier demand in this highly dynamic sector.
Digital Retail Evolution
While retail was already in a digital shift, the pandemic has accelerated the change and pushed companies to revamp their decision-making process to focus on speediness, inventory stocking and new technology, the report stated.
“E-commerce continues to propel a huge wave of industrial leasing globally, and the demand is becoming more widespread across all industries,” said Craig Meyer, president, Industrial, JLL. “The number of unique active tenants has surged as companies rush to build up their e-fulfillment capacities and, despite a normalization of the market as the effects of the pandemic wind down, we expect to see this trend hold strong over the next three years.”
Last year, e-commerce was the overall standout performer in the logistics sector, marking the highest year-on-year growth take-up by any occupier group globally. It represented more than 16% of 2020 total logistics and industrial leasing in the United States, 22% across Europe and as much as one-third in China, according to JLL. Survey respondents expect the e-commerce sector to drive demand in logistics, but global growth across all warehousing and distribution sectors is predicted.
Addressing Limited Land Supply
In order to sustain future growth, survey respondents to the JLL survey pointed to two concerns that must be addressed. The first is the limited supply of entitled land for logistics, with firms already delaying decisions because of a lack of space. For example, vacancies are sub 3% in several cities including Toronto, New York, Los Angeles, Milan, Tokyo and Hong Kong. Moreover, 65% of respondents in Germany, China, the Netherlands and Australia deemed limited availability of entitled land as the biggest constraint on occupier demand. Interestingly, workforce shortages are considered to have a lower impact than other factors on constraining future demand, the report stated.
Adopting Sustainable Solutions
Second, the sector must be faster to adopt sustainable solutions, as the pressure to decarbonize continues to mount. Currently, the sector’s focus is mainly on solutions that yield cost savings. For instance, 73% of respondents rated improving energy efficiency as the highest priority globally. In Europe, however, there is a greater impetus to reduce overall carbon emissions and use sustainable transport, signaling the direction of travel for the entire industry.
In Europe, the highest share of respondents (40%) stated that they observe some occupiers already taking “significant action” toward decarbonization. Asia Pacific had the largest share of respondents (47%) rate “enhancing green/renewable energy generation and use”—for example, rooftop solar panels and wind turbines—as a high priority over the next few years. On the other hand, the Americas lag on renewable energy, possibly due to a lack of government incentives to support implementation, the report noted.
“Governments, municipalities, supply chain experts and the real estate industry need to partner to find innovative solutions to creating efficient supply chains and real estate,” said Jeremy Kelly, lead director, Global Cities Research, JLL. “This partnership is the best way to meet high expectations for just-in-time deliveries.”
Transformative Technology
Looking ahead to the sector’s future, JLL stated in the report that technology will play a major role in transforming building design and supply chains, helping to resolve the concerns about land supply and sustainability solutions. Currently, only the larger occupiers and developers with global and regional networks have adopted advanced technologies and automation solutions, but 90% of global respondents agree or strongly agree that investing in automation and robotics is the clear option for improving supply chains in the future. Cold storage and e-commerce companies are expected to lead the way in the adoption of technology.
