Archives for 2021

Industries servicing the last mile continue to see an increase in leasing as consumer pressure for speedy deliveries soars across urban cores

The industrial real estate sector continues to break records going into the tail end of 2021. The increase in online shopping has become a primary driver of demand for smaller logistics facilities, making the most popular size segment for leasing 10,000 to 49,000 square feet in the third quarter, according to JLL’s Q3 Industrial Report. Nationally, more than 137.9 million square feet of total industrial product was leased in Q3, a new high for 2021.

More than half of leasing in the U.S this quarter came from users looking for space below the 100,000 square foot threshold. The surge in ecommerce, labor shortages, and consumer expectations, in terms of speed and delivery of product, have added more pressure than ever to the supply chain and its operations. As a result, industries servicing the supply chain and e-commerce, continue to experience an increase in demand.

In Q3 the Logistics and Distribution and third-party logistics (3PL) industries accounted for 28.3 percent of total leasing volume. As more and more companies continue to outsource their operations to meet consumer online demand JLL expects these industries to flourish, especially within the 3PL sector.

“With demand for industrial space showing no signs of slowing down, new inventory will be needed to bring supply and demand closer to equilibrium and negate a future shortage of industrial space,” said Craig Meyer, President, Industrial, JLL. “As ecommerce grows, now more than ever Logistics and Distribution and 3PL will be at the forefront, especially with the upcoming holiday season and impending impacts from the cargo ships backup logs observed at the close of the quarter.”

Another strong indicator of demand can be measured by rapid growth in urban logistics, specifically of light truck driver hiring. While the U.S. has seen a 15 percent increase in light truck driver hiring since 2019, the Outer Boroughs of New York City have seen a 24 percent increase in hiring over the same time frame according to a JLL analysis of EMSI data, showcasing the demand for last mile in prime urban cores. Additionally, according to JLL research, in Q1 2019 there was 542,680 square feet of overall industrial space under construction in the Outer Borough’s development pipeline, and by the end of Q3 2021, that has already grown to 3,464,160 square feet under construction.

“In a world of two-hour shipping, consumers have come to expect a specific window for their goods to arrive. The growth in online shopping and the need for fast delivery times is driving demand for urban industrial space unlike ever before,” said Leslie Lanne, Executive Managing Director, Urban Logistics, JLL. “Ecommerce will keep driving the need for vertical space, and as a result we’re going to see this new urban logistics asset class spark progressively more developer and investor interest.”

Small bay warehouse facilities in NYC and Northern NJ, specifically those under 100K square feet, have seen a steady increase in both square footage and leasing since 2019. According to JLL data, at the end of Q3 in 2019, the region accounted for 148 small bay leases totaling 4,480,374 square feet. Now at the end of Q3 in 2021, the region accounts for 213 leases totaling 6,005,999 square feet.

Investors searching for yield identify this space as a growing opportunity segment and are deploying capital toward acquiring scale. For example, a joint venture formed between Arden Group and Arcapita Group recently announced plans to invest up to $2 billion in acquiring small- and medium-bay multi-tenant warehousing space across major U.S. markets.

“With the tremendous leasing velocity that we are seeing in every market around the country, buy-side underwriting and investor demand for this segment of the market is stronger than what we currently see within the big-box segment,” added Trent Agnew, Capital Markets Platform Co-Leader for JLL. “The primary driver for this product type is rent growth, as we are seeing renewal rents on smaller spaces routinely push up 30 to 50 percent at expiration, driving significant NOI growth.”

With construction costs continuing to increase, investor demand for small bay warehouses is expected to continue increasing, which is anticipated to drive further cap rate compression in 2022. Select core markets are seeing class B product trade at a sub-4 cap.

Source: “Small to Mid-Size Industrial Real Estate Dominating the Leasing Market“

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“