Entitlement and Construction for New Industrial Builds are Dragging

The entitlement and construction process for new industrial builds is taking five months longer on average than it did pre-pandemic, impacting both developers and tenants alike.

New research from Newmark notes that the delays have also caused a “significant backlog” of facilities in the construction pipeline.  Starts increased by a whopping 64% between 2019 and 2021 to meet a 120% increase in tenant demand—but deliveries ticked up by just 5.7% during that time.

“Every stage of the construction timelines from the entitlements process to the active construction schedule has been hampered by two years of challenges that are unlikely to subside during the balance of 2022,” the report notes. “Well-documented volatility still reigns in the construction materials supply chain, exacerbated by geopolitical conflict and pandemic-related shutdowns in Asia. Lead times for roofing materials, for example, are still 30-to-50 weeks out on average.”

And a so-called “web of labor shortages, from understaffed local governments to a lack of skilled construction workers,” is also at play. Newmark analysts note that many markets are facing community opposition to more warehouses—which has had the effect of completely scuttling some planned developments. 

Construction costs have also skyrocketed by 22% year over year as of May, and that—combined with strong but still decelerating demand and the increased cost of capital—are waylaying some developers’ plans: “Anecdotally, some developers are temporarily pausing new project plans; others are selling development sites,” according to Newmark. 

Chicago has been most impacted by delays, with the entitlements-to-completion journey now 80% longer now than in 2019. By way of comparison, secondary, less land-constrained markets across the central and southern US often have fewer development hurdles and more concentrated labor pools.

“Tenants with move-in requirements this year will likely continue to face competition for limited supply in most markets, particularly those with a low volume of speculative development relative to the existing inventory,” the report predicts. “Some occupiers wishing to build and own their facilities rather than lease may find increased opportunity with development sites put up for sale. Deliveries will substantially increase into 2023 and are projected to exceed demand, offering tenants some respite after nearly two years of extreme space scarcity. Despite the historic expansion of tenant demand for industrial space decelerating in the mid-term, some expected developer pullback in the next six-to-12 months may precipitate tight supply conditions further down the road, especially on the tailwinds of continued structural demand for new warehouse space.”