Bulk Industrial Demand Drops Sharply in Q1

Industrial had been one of the two major darlings during the high points of the pandemic, along with multifamily. Now financing for multifamily is ebbing. As for industrial, bulk space demand hit a steep drop, according to Colliers, as higher interest rates and ongoing inflation twist the arm of the economy.

Total demand for bulk industrial space — that for tenants who need at least 100,000 square feet — dropped 47% in Q1. Not year-over-year, but quarter-over-quarter, representing a sudden jam on the brakes.

Not that the subsector has had a complete collapse. Far from it. Demand was still “slightly above 93.6 million square feet.” That is nearly the figure from 2021’s Q1.

Still, the figures represent a rapid drop and that’s a warning sign given what bulk space represents.

“Bulk tenants prefer newer facilities that offer the advantages of higher ceiling heights, ample power supply, generous parking provisions, enhanced building amenities, and a greater focus on environmental, social, and governance (ESG) factors,” Colliers wrote.

Many existing properties don’t provide what the companies need, which is why they contract for new space. A fall in demand for this type of space is a proxy for the overall business of a collection of industrial sectors. Some of the largest in terms of demand are third party logistics (35.4%); general retail and wholesale (15.0%); manufacturing (14.9%); food, beverage, and pet supply (10.5%); and motor vehicles, tires, and parts (8.3%).

“To kick off the year, third-party logistics and packaging companies (3PLs) maintained a significant lead in market share, growing to 35.4% in Q1 2023 as the primary occupiers of bulk space, from 28.1% in 2021,” they wrote. “On the other hand, e-commerce demand, which previously dominated bulk space, substantially declined year-over-year, to 6.7% of market share, dropping from 14.5%. General retail and wholesale also lost market share, by 310 basis points, settling at 15.0%, while food, beverage, and pet supply market share increased 200 basis points year-over-year, to 10.0%.”

An important part of the picture is Amazon, which was the biggest occupant of bulk space in Q1 with 4.6 million square feet, followed by Uline (2.3 million square feet), Target (1.9 million square feet), DHL (1.5 million square feet), and Wilton Industries (1.5 million square feet).

But numbers at a given time offer only a snapshot of a picture that can change. Amazon, for example, cut 53 million square feet from its overall warehouse space in September 2022 and in March of this year shut down 99 logistical facilities in 30 states.

Of the total transactions of almost 93.6 million square feet, the breakout by region was the Midwest (35.2%), West (31.7%), South Central (17.3%), Southeast (12.0%), and Northeast (3.5%).