If there was ever a time to invest in industrial real estate, it was about six months ago. But today is just as good, as the industry continues to grow explosively. The National Association of Realtors (NAR) has released new figures for the industrial sector, and to the surprise of almost no one, there still isn’t enough room for everyone who wants to rent industrial space.
Industrial real estate, for the uninitiated, includes sexy properties such as warehouses, factories, distribution centers and shipping centers. That’s a big part of why it’s such a neglected space — they’re basically invisible industries to the modern American. But the pandemic has created remarkable growth potential in this space, virtually overnight.
Industrial space is essentially sold
According to December figures from NAR, industrial real estate continues to see demand significantly outpace supply for the fourth consecutive quarter, including the fourth quarter of 2021. Net absorption has already exceeded 485 million square feet for l ‘year, even if the fourth quarter has not yet closed. This is a dramatic change from the 12-month period that spanned the third quarter of 2020 through the third quarter of 2021, which saw another all-time high of 453 million square feet.
The industry has always had a historically low vacancy rate, but nothing like the 4.2% it reached in Q4 2021. That’s down from the 4.6% vacancy rate in third quarter and the previous record set in the third quarter of 2018 of 4.7%. Frankly, the highest vacancy rate seen in the 2020s (all suffocated by pandemic challenges) was 5.6% in Q3 2020.
During the Prologis (PLD -1.75% ) earnings call at the end of October 2021, CEO Hamid Moghadam summed it up well: “With vacancies at unprecedented levels, the space in our markets is effectively exhausted.”
Industrial rents continue to rise
Sure, all those low vacancy rates will drive up rents across the board, but how far can you go before businesses start to pull back? Apparently we haven’t found that number yet. In Q3 2021, industrial space averaged $9.51 per square foot, but it was $9.72 as of December 1, 2021.
Year-over-year, rents rose 8.2% across all industrial classes, and all 390 metro areas monitored by the NAR saw their industrial rents increase. Miami is the best performer, with a 14% year-over-year gain, but other metropolises are also seeing colossal gains, including northern New Jersey (13.7%); Nashville, TN (13%); Philadelphia (12.8%); and Fort Lauderdale, Florida (12.3%).
What explains this increase in demand?
There has always been a reasonable demand for industrial space, but what we’re seeing right now is downright unprecedented. There are many reasons for this, of course, and if I had just one word to describe it all, I would simply throw my hands in the air and shout “PANDEMIC!” at the top of my lungs. But that’s not what we’re doing here, so let’s look at the actual factors involved.
First, and probably most importantly, e-commerce has seen an explosive gain in market share. According to the U.S. Department of Commerce, e-commerce saw a 39.1% year-over-year increase in sales volume from the first quarter of 2020 to the first quarter of 2021. This is an unadjusted figure . The adjusted figure is 39.3%. So from the start of the pandemic in the first quarter of 2020 to a year later, e-commerce was catapulted something like a decade later. It has only grown since then, but not as dramatically.
With so many new e-commerce activities, there must be new shipping centers, new sorting facilities, new warehouses to store all the goods before they are picked and shipped, or even new facilities of the last kilometer. All of these “stuff” take up space, even if they don’t stick around for long.
Second, many retailers, e-commerce and traditional, are shifting from a “just-in-time” to a “just in case” sourcing model. Just-in-time supply chains rely on the speed of a “normal” supply chain to produce and move products as needed, so companies don’t have to hire as many storage space for things that might not sell right away. It was the old way. Just-in-case models, on the other hand, rely on storing products so that they are available regardless of what the supply chain is doing (or not doing).
Guess where they put all that excess inventory. Warehouses. Correct. You get a gold star.
Building enough industrial space is tricky
It should be pretty easy to construct an industrial building and reap the benefits of this explosive market, but it’s just not that easy right now. Long-term labor shortages in the construction industry have already put a huge damper on the style of builders across the spectrum, and now supply chain issues continue to wreak havoc on builders. costs of construction products, as well as on the availability of construction products.
Is it just me, or is it kind of ironic that part of the bottleneck that’s slowing down building more warehouses is that there aren’t enough warehouses to store building materials ?
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