Archives for November 2021

For every Cyber Monday purchase, there is a warehouse employee packing up those soon-to-be presents.

The big online shopping holiday comes amid a warehouse shortage across the United States as distribution center vacancy rates are at all-time lows. Nearly 96% of existing industrial space is in use, according to commercial real estate services company JLL.

The U.S. may need an additional 1 billion square feet of new industrial space by 2025 to keep up with demand, JLL estimates.

“The industry is effectively sold out through the next year,” Chris Caton, managing director of global strategy and analytics at Prologis, told CNBC.

Rents are at all-time highs and pre-leasing rates have skyrocketed, which is when warehouses are leased before construction is even complete.

“The leasing volume is almost triple in some cases to what’s being built every year,” Mehtab Randhawa, senior director of industrial research for the Americas at JLL, told CNBC.

For example, another nearly 190 million square feet of warehousing space was under construction in North America during 2020, and more than 43% of the buildings were pre-leased, according to CBRE.

This demand is driven by retailers beefing up e-commerce operations amid the online shopping boom, and investing in faster delivery thanks to consumer expectations. Retailers are also securing more storage space in the U.S. to mitigate the impact of future supply chain shocks, like those caused by the coronavirus pandemic.

Plus, e-commerce and logistics take up three times as much space as brick-and-mortar retail.

The expansion of warehousing has shifted local economies, like in the Lehigh Valley of Pennsylvania.

The rapid growth has created controversy over land use because the warehouse boom is tightening the supply of land.

“Our folks … are very upset about the warehouses, and they’re very upset about the truck traffic that it’s creating,” Northampton County Executive Lamont McClure told CNBC.

That’s pushing industrial developers to get creative and find more unconventional spots, like a Lehigh Valley aqua park and scuba diving center if they want to keep building.

Lehigh Valley native Stuart Schooley told CNBC that he and some friends tried to stop the construction of the first warehouse on their street.

“We realized we couldn’t stop it … [and it] just started a progression of one warehouse after the other. We were the last property,” Schooley, owner of Dutch Springs, a diving center and aqua park in the Lehigh Valley, told CNBC.

Now, Schooley is selling the land so he and his wife Jane can retire.

Real estate developer Trammell Crow is purchasing the property and looking to build two warehouses on the land.

“We used to be quite welcome, and the worm has definitely turned, especially in places like the Lehigh Valley, where I think people feel like when is enough, enough?” Andrew Mele, managing director in Trammell Crow’s Northeast metro division, told CNBC.

So, what do all these warehouses mean for American consumers and business people from Wall Street to Main Street?

Source: “How Warehouses are Taking Over the U.S.“

Sale prices have topped $200 per square foot in four West Coast markets.

Industrial sales volume so far this year has already surpassed 2020’s year-end total, with $51.2 billion in deals closed through October.

The average sale price of industrial assets is now at $110 per square foot, a 25% increase over 2020 figures, according to new research from CommercialEdge. That average price has also increased every quarter so far this year, from $96 psf in Q1 to $108 in Q2 and $120 in Q3.

“An increasing number of investors are chasing industrial assets, driving up prices for commercial real estate’s hottest asset class,” the report notes. In addition, average sale prices have ticked up in nearly every major city tracked by the firm, with the largest increase in Detroit  (from $39 per foot in 2020 to $69 per foot this year, a 84% increase), Nashville ($73 to $109, an increase of 50%), New Jersey ($133 to $199, a 49% increase) and Denver ($119 to $172, an increase of 45%).

Sale prices have topped $200 per square foot in three California markets: Orange County ($294), the Bay Area ($223),and Los Angeles ($221), as well as in Seattle ($204).

Industrial has been an investor darling throughout the pandemic, with prices increasing steadily among booming demand for space. More than $100 billion has been spent on industrial properties this year, according to Real Capital Analytics, and the asset class saw the fastest annual and monthly price upticks of all sectors at 18.9% in October from a year ago and 1.9% from September.

“Investors are purchasing these properties based on rising demand driven by e-commerce and supply chain disruptions,” says John Chang, Senior Vice President and Director of Research Services at Marcus & Millichap. “But even though industrial absorption is at a record level, so is construction, and new development could ultimately bypass demand.”

Source: “Industrial Deals Have Now Surpassed 2020 Levels“

A combination of demand and lower global production is the reason.

Global steel prices may be on the rise again, which is bad news for construction and commercial real estate, especially in such asset classes as industrial, retail, and larger multifamily.

T.V. Narendran, CEO of Indian producer Tata Steel, told CNBC that prices for the material could be “much higher”—more than $600 a metric ton—in the near future.

“I expect it to be in that space and that range — fluctuating of course, but fluctuating at a higher level than we’ve seen in the past,” he told the program’s Street Signs Asia late last week.

“The impact on real estate development has already begun to be felt as sub-contractors, who use everything from rebar to beams, are seeing pricing gap out on existing contracts,” Jonathan Lee, principal and managing director at George Smith Partners, tells GlobeSt.com. “This has caused an escalation in project level costs which has been exacerbated by the supply chain issues we have seen. The bottom line is project returns are getting increasingly thin until inflation hits actual rents.”

Data from the U.S. Bureau of Labor Statistics shows a sharp increase in cold rolled steel and strip prices from 2018 highs of $252 to almost $702 in October 2021. According to Associated Builders and Contractors, “Steel mill product prices have increased 141.6% since October 2020, while iron and steel prices are up 101.5%.”

China was a major driver of lower steel prices for years. In the past, the country provided at 30% subsidy through free land, free power, and loans that didn’t have to be repaid, Usha Haley, a professor of management and director of the Center for International Business Advancement at Wichita State University and co-author of Subsidies to Chinese Industry, told Fortune in 2019.

Haley, who had closely studied China’s steel production, said the country annually added the equivalent of Japan’s production, which was the second largest producer. The Department of Commerce has accused China of steel dumping multiple times.

But China’s steel exports have been trending down since 2016, according to the US International Trade Administration. They have dropped by more than half and will likely continue to fall as China tries to focus on reducing carbon emissions.

Demand is increasing throughout the world, including North America, according to the World Steel Association, where use was up 13.7% from 2020 to 2021 and is projected to jump another 5.4% in 2022.

Rising prices have made some wonder whether there was a market bubble. But JLL chief economist Ryan Severino told GlobeSt.com in October that things didn’t feel like a bubble. “This feels like a case of demand running up faster than supply which is a widespread issue right now,” Severino said. “Demand for inputs and final goods has come racing back faster than supply—not just bringing back old capacity but investing in new capacity.”

Source: “Steel Prices May Be Heading Higher in the Near Future“

Changes in carrier decisions also play a part in a new flood insurance scene.

Flooding is an ugly and devastating way of seeing property value wiped away. According to the Federal Emergency Management Agency’s standard warning, an inch of standing water in a single-story 1,000 square foot home can cause $11,000 of damage.

But the potential for damage to commercial buildings is just as grave, if not more so. For example, a 2017 study out of the University of Nebraska at Omaha showed that “[c]ommercial buildings represent 13% of all structures in the 100-year floodplain in Sarpy County (Omaha, NE) and 16% in Fargo/Moorhead (ND and MN), yet account for half of total potential flood damage exposure as represented by depreciated structural replacement values (DSRVs).”

Both having and understanding flood insurance is critical to CRE property management. Some recently changed plans and practices require businesses and investors to reevaluate where they stand.

FEMA updated its National Flood Insurance Program (NFIP) through a new approach called Risk Rating 2.0. Using new technology and data analysis, the agency is changing how it views the risk of floods. New policies incorporated the new approach starting on October 1, 2021, while renewals on April 1, 2022 or later also will use the changed methodology.

The new approach uses new physical models and actuarial models, looking at flood frequency, flood type, distance between the property and water body, and property rebuilding cost, according to Carter Bumgardner, a producer at Graham Company, one of the largest insurance brokers in the US.

“Because technology is getting so much better and the carriers and FEMA can run much better predictive models, they are better at pricing. Whether that’s going up or down depends on the risk itself,” Bumgardner tells GlobeSt.com. “I believe over 70% of insureds that buy a national flood insurance policy [will see] their rates for that specific policy go up.”

Blame climate change. Large floods have scared carriers and the federal government into reassessing the likelihood that a property will face a loss from flooding.

“Flood insurance has been changing drastically over five to ten years with how underwriters are evaluating the risk,” Bumgardner adds. Carriers “felt they could give higher limits with lower deductibles and collect less premiums” for structures considered not to be in high hazard flood zones. No longer. “They’re now offering less limits, higher deductible with a higher premium” using new modeling techniques”

As prices go up, there are strategies companies can use to try containing the cost. “A national flood insurance policy is normally only going to provide limits of $500K for the building, $500,000 for the contents, and no coverage for business interruption,” says Bumgardner. Commercial coverage typically has a $500,000 deductible. Put the two together, and it’s possible to bridge coverage.

Bumgardner also says that stripping flood insurance out of a normal property and casualty policy and getting it through an alternative carrier can help contain costs.

Source: “New Flood Insurance Rules Will Matter to CRE Property Owners“