Time Between Completion and Stabilization for Spec Warehouses Continues to Shrink

Good news for spec warehouse construction: the battle between supply and demand in industrial has tipped in the favor of developers. According to new research of 23 key markets from Newmark, tenants can’t get enough of new warehouses and developers are having a hard time getting spec construction wrapped up and delivered. That means notably short times between delivery and stabilization.

Three dynamics are governing spec construction and stabilization in new warehouses of 100,000 sq. ft. or larger. First, spec delivery fell sharply and was significantly under the levels of every year since at least 2015. Developers are feeling the pinch of a series of issues. “Speculative construction deliveries fell significantly in 2021 with developers citing pandemic-related labor disruptions, sourcing materials, lengthening entitlement periods, and community pushback to warehouse development as the primary causes,” the report stated.

At the same time, demand for new warehouses has never been stronger from third-party logistics suppliers, consumer goods manufacturers, and e-commerce companies. 

The third dynamic is that developers know what the leasers want. New warehouse specs are uniform across the country, so once one is in place, there’s a race on among tenants who can move quickly and take advantage of what have become standard designs and facilities.

The result: the time between completion and stabilization has fallen. In 2015, it took 3.9 quarters of lease-up for a building to become stabilized. In 2018, that number was down to 3.5 quarters. By 2020, it was at 2 quarters. In 2021, though, the period was down to 0.7, or just over 2 months.

Those figures vary by market. At the low end, in Los Angeles, the average spec lease-up period was 0.1 quarters, or under two weeks. The high end in Seattle was 1.6 quarters.

“The construction pipeline rose to half a billion square feet underway in Q4 2021, the most on record,” the report noted. “Speculative warehouses account for approximately 77% of that volume, in line with the 5-year average share. As disruption to construction timelines subsides and speculative deliveries increase, experts expect the average lease-up period to gradually lengthen over the next few years as tenants are presented with more options. Tenants with move-in requirements this year will face a continuing environment of scarcity and competition in most markets, as supply-chain and labor challenges persistently impact delivery timelines.”

But those construction delays temper the good news because it’s difficult to build enough to satisfy potential tenants. Also, in some metro areas, once a lease is signed, the contracted rate is already under what the market commands, pushing some landlords to put off leasing to capture a higher rate.

Newmark notes that experts look to a larger construction pipeline. As supply chains start to move back to normal, lease-up periods will likely begin to lengthen.