There 'Simply Isn't Space to Lease' in Industrial Anymore

Industrial leasing activity fell below 200 million square feet in Q2, according to Cushman & Wakefield’s report, but only so because there “simply isn’t space to lease,” said its top researcher.

That was part of the report’s positive news that included the vacancy rate falling to an all-time low of 3.1 percent. This was the seventh quarter in a row that demand outpaced supply.

The quarter saw overall absorption of 120.4 million square feet (msf), up 3.9 percent quarter-over-quarter (QOQ) but down 10.4 percent year-over-year (YOY). New leasing activity recorded 187.1 msf, down 15.3 percent QOQ and 25.7 percent YOY. 

Carolyn Salzer, Americas Head of Logistics & Industrial Research, added in prepared remarks that, “Given the robust construction pipeline and healthy market conditions, industrial leasing is on track to see another banner year.”

Rental growth QoQ climbed 6 percent with rents hitting an all-time high of $8.36 per square foot (psf), up from $7.89 psf last quarter, and $7.03 psf this time last year.

“We’re starting to see a trend back to building on spec versus build-to-suit, which is something to keep an eye on; however, with such low vacancy and insatiable demand, the sector’s overall outlook continues to show strong fundamentals throughout the remainder of 2022 and beyond,” Salzer said.

There is 699 million msf of industrial space under construction, surpassing last quarter’s record of 661.5 million msf, and up from 46.9 percent this time last year that had 475.9 million msf under construction.    

Completions are also up, with a 36.1 percent increase YOY, 18.1 percent QOQ, and as of the mid-year mark there has been 193.7 msf completed, up 27.4 percent.

Southern Cal (Including Ports) Shows Strength

Yardi’s recent Commercial Edge data showed strength in Southern California where national in-place rents for industrial space averaged $6.53 per foot in May, up five cents from April and 4.7% over the last 12 months.

Rents continued to grow fastest in coastal markets, led by Los Angeles (7.2%), the Inland Empire (6.8%) and Boston (6.6%).

Furthermore, tenants are paying a hefty premium for new space, with the average price of a lease signed in the past 12 months costing $1.17 per square foot more than the overall average, according to CommercialEdge.

“Spreads between average in-place rents and new leases should continue to grow in the near future, fueled by robust demand for industrial space and inflation,” said Doug Ressler from Yardi Matrix.

The markets with the largest spreads between average rent and new leases were ports, led by those in Southern California.

Tenants paid an average of $3.96 more per foot in Los Angeles than the market average of in-place rents.

In the Inland Empire, the spread was $3.80 per foot and in Orange County it was $3.74.

Across the country, spreads in Eastern port markets are not as extreme, but tenants signing new leases are still paying a large premium. In New Jersey, new leases cost $2.87 more per foot, and in Boston the spread is $1.78.

Omni-Channel Strategies Trending

“Strong demand for logistics space has been driven by the shift from e-commerce brought on by the pandemic, with many retailers shifting towards omni-channel strategies,” Andrew Zola, Consultant at CoStar Group, tells GlobeSt.com. 

“A majority (62%) of the change in demand (net absorption) in 2021 was accounted for by diverse tenants, including retailers such as Nike, Chewy, The Home Depot, and Target, among others.”

This has pushed vacancies down to 4% as of 22Q1, according to CoStar data.

“Strong demand combined with limited availability has helped push rent growth as well,” Zola said.

As of 22Q1, rent growth exceeded 11% year over year. Rent growth is expected to remain elevated over 7% through the middle of 2023, according to CoStar data.

“Limited availability has led to high levels of speculative construction, which has performed strongly since the pandemic began,” Zola said.

According to CoStar data, 2020-year builds are now 4% vacant two years after completing construction, on par with the industrial market, while 2021-year builds are 8% vacant one year after completing construction, as of 22Q1.

“This is much faster than the lease up of pre-pandemic builds (2016-2019), which averaged a 20% vacancy rate after four quarters, and 8 % after eight quarters,” Zola said.

“Moving forward, we expect strong demand for new space to continue, mitigating the supply pressure from new construction within the market. This should also help rent growth moving forward as more tenants move into new space.”

Softening Economy Not a Problem

Daniel Laub, Co-Founder and COO of Zenith, tells GlobeSt.com that despite the recent softening in the economy, the fundamentals in US industrial real estate remain extremely strong.

“Long-term tailwinds such as the continued growth of e-commerce and last-mile distribution coupled with a strong population growth have contributed to growing demand for industrial space,” Laub said. “At the same time, supply continues to tighten in industrially zoned areas as space is taken out of the market through development and up-zoning to higher density uses.

“Supply chain disruption, stockpiling and the rise of onshoring post-pandemic have also been recent contributing factors to pent up demand for space.”

Locations Near Transportation, Infrastructure Ideal

Allan Swaringen, president & CEO of JLL Income Property Trust, tells GlobeSt.com, “as a core, income-oriented investor, industrial has been one of our highest conviction strategies over the last five years, initially due to the inevitable growth of e-commerce increasing demand for warehouse space.

“The global pandemic only accelerated this trend and the more recent disruptions in national supply chains coupled with reshoring of manufacturing back to America has continued the growing demand for industrial space driving both absorption and rental growth rates.

“Our geographically diversified portfolio of over $2 billion in warehouses continues to be a top performing sector for us. While the national trends are quite compelling, we continue to invest in specific and narrowly defined markets based upon our research-led strategy geared towards locations proximate to irreplaceable transportation infrastructure. These locations have proven more resilient across numerous market cycles.”

Retailers Having to Address Storage

Lanie Beck, director of corporate research, marketing & communications, Stan Johnson Company, tells GlobeSt.com that all facets of the industrial sector remain “red-hot,” including leasing, investment sales, and development. 

“Tenant demand for industrial space is surging, as illustrated by record low vacancy across the market,” she said. “This demand is being driven by the fact that retailers are now having to address product storage issues caused by supply chain woes, coupled with their ongoing need to support traditional growth and expansion. 

“There continues to be increasing consumer demand for goods delivered quickly, and next-day or same-day delivery services are now being expected in increasingly smaller markets. 

“Developers can’t build new space fast enough to satisfy, which further intensifies the attractiveness of the existing inventory.”

While a preliminary look at sales volume totals for Q2 2022 suggests there could be a slow-down in investment volume from Q1, Beck said, “buyers are still actively seeking out new and existing industrial product at a rapid clip given how critical this sector has become.”

On the Right Track

David Welch, CEO of Robinson Weeks, tells GlobeSt.com that he is seeing strong demand in all of his markets, including Atlanta, Dallas, San Antonio, Charleston and Memphis, where it currently has facilities under development. 

“Demand is strong among 3PLS in these regions, which is consistent with their strong demand at the national level,” Welch said. “E-commerce-related companies, save for Amazon, are quite active as they continue to catch up with their logistics networks. 

“We are also noticing strong leasing activity near ports and ramped up net new requirements for expansions and new markets.”

Bob Smietana, chairman and CEO of HSA Commercial, tells GlobeSt.com that he’s seeing absorption outpacing new deliveries with rents increasing at HSA Commercial’s industrial parks in Southeast Wisconsin, Indianapolis and South Florida.

“We anticipate demand will continue to exceed supply over the next year,” Smietana said.

GTIS Firm in Nashville

Gaurav Sahay, managing director, industrial/logistics, GTIS Partners, tells GlobeSt.com, “Most, if not all, industrial markets, particularly in the sunbelt where GTIS has recently closed an investment in Nashville and is doing due diligence on opportunities in the Carolinas for our opportunity zone fund, continue to see strong fundamentals.

“This is being driven by population growth, e-commerce growth, reshoring/nearshoring, proximity to end consumers, and closeness to logistics infrastructure hubs to further reduce transport costs.”

Vacancy is expected to remain low as leasing velocity remains elevated as demonstrated by strong pre-leasing in the under-construction pipeline.