Building the last mile: e-commerce propelling industrial real estate

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Despite the COVID-19 pandemic, or rather because of it, e-commerce has propelled a banner year for warehouses and the industrial real estate sector in 2020.

“E-commerce was the trend of the last year,” said Carolyn Salzer, senior director of industrial logistics research at Cushman & Wakefield, the Chicago-based commercial real estate services firm. “It’s really increased in recent years, but the acceleration exacerbated by the pandemic has just set unprecedented levels of uptake and rental activity.”

In fact, the last quarter of 2020 was the strongest on record, with 89.8 million square feet of net absorption, according to Cushman’s Fourth Quarter Industrial Marketbeat report. Net absorption, the amount of occupied space minus the amount that became vacant, for all of 2020 was over 268 million square feet, up 11.4% from 2019. At the same time, new rentals reached a record high of 659.1 million square feet.

‘Industrial [real estate] hasn’t just withstood the pandemic, it’s truly thrived in it.

Add to that a 4.6% year-over-year rent increase to $6.76 per square foot, another record high, and a vacancy rate of 5.2%, or 60 percentage points. basis less than the 10-year average of 6.6%, and that’s no surprise to investors. turn to the industrial sector. As other types of commercial real estate have faltered, many investors have supplemented their portfolios with properties offering long-term tenants who provide stable cash flow.

Demand still exceeds supply, Salzer noted, but there is more industrial space under construction than ever before.

“For the United States alone, not North America, there’s 360 million square feet in the pipeline, which is crazy,” Salzer said, citing the Marketbeat report. Approximately 42% of this space is pre-released.

“Safety stock” planning

Along with the rise in e-commerce, inventory issues have been the other big factor driving the need for industrial space, said James Breeze, global head of industrial and logistics research at CBRE.

“The industrialist has not only withstood the pandemic; he really thrived there,” Breeze explained.

About 70% of the sector is warehouses and distribution centers, with the rest being a mix of research and development, manufacturing, and some flex spaces that may have showrooms or offices as well as a warehouse.

In recent months, Breeze has seen increased demand from third-party logistics companies that help manage distribution and fulfillment for other businesses. These 3PLs, as they are called, were the most active occupants of large industrial spaces, with a market share of around 26%.

This industrial campus in Whittier, California, was sold to Los Angeles-based industrial real estate investment firm Rexford Industrial for $296.6 million,
or $300 per square foot, end of November.
Photo: CBRE

Transactions have become more common for facilities used primarily for storing so-called “safety stock,” or supplemental inventory, in an effort to avoid the supply chain disruptions experienced in 2020, a he declared.

Light industrial, which describes space under 25,000 square feet, was also surprisingly strong, according to Breeze.

“We thought it would be a struggling sector because it’s occupied by small businesses,” he explained. “But due to government programs and the economy improving faster than expected, we have seen vacancy rates remain low and transaction volume has actually increased. [in 2020] compared to 2019 by 22%”.

Rents for light industrial facilities have outpaced the overall market, rising 36% in 2020, while vacancy rates are around one hundred basis points lower than the overall average, Breeze added.

Additionally, cold storage has become a “hot type of commodity,” noted John Huguenard, senior managing director of JLL Capital Markets’ Chicago office, Americas. Many third-party logistics companies have invested in these facilities near cities to keep up with the growth of online grocery shopping, which jumped 40% in 2020, according to a JLL report.

These so-called AMZN last mile distribution centers,
-5.95%

WMT,
-0.73%
command higher rents, from $20 per square foot to $35 per square foot, Huguenard added. In the New York area, rents could be in the upper $30 per square foot.

A mobile workforce

Some of the strongest regions for industrial expansion are the south, especially around Atlanta and the Dallas-Fort Worth area, the southeast, the Los Angeles metro area, Chicago, central New Jersey and along Pennsylvania’s I-81/I-78 corridor, according to CBRE’s 2021 industry outlook.

Many of these markets are seeing an influx of residents as remote work and the need for more space pushes home buyers from major metro areas to more affordable secondary cities. As the population increases, the need for warehouses also increases.

Located on 21.2 acres, this 289,839 square foot “mission critical” distribution center near Orlando, Florida was sold for $71.45 million in a
2020 deal led by JLL. The facility is fully leased to a global beverage company.
Photo: JLL

Although experts predict the industrial use market will remain robust, finding enough labor and the right kind of labor has long been a challenge. Although warehouse labor was one of the only labor sectors to grow last year, supply is still limited, according to Breeze.

“As the overall economy improves, this will further reduce the stock of available employees,” Huguenard said. “Because of this need for streamlining, we’re going to see this artificial intelligence and this use of automation a lot more in fulfillment centers.”

Aside from potential labor issues, the outlook for the industry is strong. Demand continues to grow, with tenants and investors willing to pay more.

“This continued growth in rents is driving up prices per square foot,” said Jose Cruz, senior managing director and co-office manager in JLL Capital Markets’ New Jersey office, Americas.

“It’s the global investors, it’s the domestic investors, it’s the users, it’s the lenders – everyone wants to be in space because there’s so much positivity in the things that are happening.”

He said there was a cap of $250 or $300 per square foot on the price investors were willing to pay. This is no longer necessarily the case, as REITs, overseas buyers and other investors seek deals with long-term customers that offer predictable cash flow in times of uncertainty.

In addition, these properties increase in value.

“We believe that overall we are 5% to 8% higher than where we were in February of last year,” Huguenard said.

He pointed out that lenders are keen to back industrial deals, so attractive long-term financing is available. “What that tells you,” he said, “is that these are global investors, domestic investors, users, lenders – everyone wants to be in space because there has so much positivity in the things that are going on.”

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