As those of us in the industry have experienced first-hand, demand for industrial and warehouse properties is higher than ever. Customer activity is setting records.
Prologis, a prominent national warehouse builder, has developed an “Industrial Business Indicator” to monitor this activity. The Prologis IBI activity index rose from 59 to 71 between the first and second quarters of this year. Logistics demand has been particularly strong, with 110 million square feet (MSF) absorbed in Q2 of this year alone. When combined with Q1 absorption, logistics space reached an unprecedented high of 194 MSF absorbed so far this year (more than double the same period last year).
Logistics demand has been particularly strong, with 110 million square feet (MSF) absorbed in Q2 of this year alone.
The Prologis report also revealed the following:
Demand for “bulk space” – i.e., properties with more than 100,000 SF – is in highest demand. Newly constructed facilities are often quickly acquired by e-commerce giants like Amazon, leaving other industrial users to compete for smaller, older spaces which is driving up the cost of Class B, C and D industrial and warehouse space.
Space utilization, which remained in the 85-85% range in the second quarter, is indicative of the supply chain challenges facing business owners as they try to keep products in stock during a period of record retail sales growth.
Record-level rent growth is also underway, with rent surging amid high barriers to new supply. Vacancies for industrial space fell to 4.1% in Q2 and rents rose by 4% -- each a new record. Top rent growth markets include Southern California, New York/New Jersey and Pennsylvania.
New construction is not keeping pace with existing demand. Projects that are permitted and in construction are already 60% pre-leased, leaving little available for those who have not made long-term commitments to a property in advance.
Robust demand, a continued undersupply, and increasingly replacement costs have experts suggesting rent growth could push above 10% by the end of 2021.
The Industrial Outlook
Given limited inventory and record-high demand, developers are working hard to entitle and monetize land that is permitted for industrial, or warehouse uses. Starts have continued to grow, fueled by record rental rates and asset value growth, yet they do not appear to be significant enough to bring down rental rate levels or growth. In fact, for the first time in more than five years, there are no markets where supply appears to be a threat to local vacancies or rents.
Much of this supply growth is expected to occur in small, lower-barrier-to-supply markets – such as inland areas located on the outskirts of larger industrial hubs.
These realities mean that the industrial and warehouse market will remain constrained in 2022 and beyond. Broad-based demand will drive robust absorption in both newer, larger spaces upstream of supply chains and in smaller infill properties near the consumption end of supply chains.
Limited availabilities, rising replacement costs, and extreme competition will drive up rents through the remainder of this year and beyond. This will make it all the more challenging for industrial users to find space appropriate for their needs – but it doesn’t mean it’s impossible.
Limited availabilities, rising replacement costs, and extreme competition will drive up rents through the remainder of this year and beyond.
If you’re in the market for industrial or warehouse space, contact us today. Our Industrial team is leader in the Industrial Real Estate sector and is ready to tackle these challenges.
About the ComReal Miami Industrial Team: The ComReal Miami Industrial Team has been assisting companies with their South Florida real estate needs for over 30 years. The industrial team specializes in the sales and leasing of industrial properties. Visit Warehouses Market and/or call 786-433-2380 for more information.
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