Originally published by GlobeSt
Just when the industrial market seemed like it could not get any stronger, the new year has seen demand for space far outpace the supply of new product, according to a new report by NAIOP.
Rents have correspondingly increased rapidly, and many firms simply cannot find space to lease.
“The scarcity is so great that firms are getting creative by renting properties that can be adapted to serve their purposes, locating facilities further away from their final destinations and building vertically,” according to the report.
“Concerns over access to future space needs have even resulted in larger firms occupying extra space today to avoid problems in the future and signing leases on buildings long before they are built. This, of course, lowers current vacancy rates and worsens the problem in the short run.
“Smaller firms often do not have this ability. Because of this, they are finding it difficult to expand. In more densely populated areas, land is physically constrained and/or zoning prohibits the ability to add supply, leaving a true shortage with no obvious solution.”
Given these trends, report authors Dr. Hany Guirguis and Dr. Michael Seiler forecast that the total net absorption of industrial space in 2022 will be 401.4 million square feet with a quarterly average of 100.4 million square feet.
In 2023, the projected net absorption is 334.1 million square feet with a quarterly average of 83.5 million square feet.
The solid upward revision of the 2022 forecast can be attributed to retailers and manufacturers expanding their inventories to avoid future supply shortages and the expected good performance of the economy in 2022 and 2023. The economy’s transition from recovery to expansion supports higher employment and a rising growth rate for real gross domestic product (GDP).
Last-Mile Servicers Continue Increase in Leasing
Much of this demand is focused on infill locations, not only because of rising transportation costs but also because tenant footprints are changing, according to Brett Turner, Senior Managing Director, Acquisitions & Dispositions at BKM Capital Partners.
“Technological innovations have reduced the footprint of many of our tenants,” Turner tells GlobeSt.com. “That widget maker who used to be in 50,000 square feet now only needs 5,000 square feet by utilizing ecommerce, same day delivery and additive manufacturing.”
“Small- to mid-size industrial users are dominating the leasing market as industries servicing the last mile continue to see an increase in leasing. From Q1 to Q3 2021, 2,500 leases were executed below 50,000 sf compared to approximately 800 in the 50,000 to 100,000 sf range.”
Hitting the $100-per-square-foot Mark
One sign of investors’ love affair with industrial has been the rapid rise in quarterly sales. In the seven quarters since COVID-19 impacts hit, these have been rising at a fast clip, Craig Tomlinson, Northmarq Senior Vice President, observes.
“We’ve seen tremendous growth not only in sales volume, but also in the total amount of square footage transacted, as well as an increasing average deal size,” he tells GlobeSt.com.
It’s also worth noting, Tomlinson said, that in Q2 2020, the average price per square foot for single-tenant industrial product surpassed the $100-per-square-foot mark for the first time in history and has been increasing since then.
“In support of NAIOP’s research, we’ve seen unprecedented levels of buyer demand with an interesting trend of seeing strong investment volume in tier 2 and tier 3 markets,” he said.
“Big cities are still holding their own, but when smaller markets make up a sizable percentage of overall sales, it suggests that institutional investors aren’t able to find what they need and may be relaxing their geographic criteria.”
SoCal and Phoenix Markets Stay Hot
Chad Jacobson, COO, DAUM Commercial, tells GlobeSt.com that NAIOP’s projections are aligned with the significant increase in demand he is seeing, especially within the key Southern California and Phoenix industrial markets.
“This hunger for space has driven up pricing dramatically in the second half of 2021 and into this year,” Jacobson said. “We’re experiencing clients selling industrial properties for upwards of 30% more than they acquired them for, after simply holding the assets for a few months.
“This has created challenges as some users are requiring as much as three-times the industrial warehouse space they did less than two years ago, purely due to ramped-up e-commerce demand.”
He said that in some cases, DAUM is able to demonstrate the benefits of moving further east into Inland Empire submarkets. For other clients, such as those in the food and beverage industry, infill locations near population hubs remain critical.
“Unlocking opportunities for owner-users and tenants that range in size and breadth of resources is still very possible,” Jacobson said. “It often requires identifying assets that might not seem an ideal fit, but can be retrofitted to fit client needs, as well as drawing upon deep and long-standing relationships in the subject markets, including those with local municipalities.”
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