Bulk Industrial Space's Big Run Coming to an End

Demand for bulk industrial space has declined considerably during the past few quarters, according to Colliers, with the number of transactions sliding by 46% year over year, and the total square feet occupied down by 49%.

This comes following last year’s third consecutive record-setting performance by most accounts.

Meanwhile, the average transaction size continued its five-quarters downward trend, according to Steig Seaward, National Director of Research, Colliers.

“Transaction volume for bulk industrial space will continue to moderate over the short term due to rising interest rates, economic uncertainty, and falling consumer confidence,” Seaward wrote recently in a Colliers report.

Bulk space is defined as tenants requiring more than 100,000 square feet.

Newmark sees similar performance. Its managing director Lisa DeNight tells GlobeSt.com that there has been a significant decline in larger deals signing.

So far this year, the number of million-square-foot-plus deals signed is equivalent to half of the number of deals signed from January through June of 2022, she said.

“This decrease is substantial, but in fact, mega warehouse leasing has just now stabilized to pre-pandemic norms,” according to DeKnight. “However, concerns are arising due to the significant share of mega warehouses currently in the construction pipeline.

David M. Boyd, CCIM, SIOR, Managing Principal of Boyd Commercial, LLC/CORFAC International/CORFAC International, pointed to similar drivers in the bulk industrial asset class.

“In Houston and across the country the bulk industrial market experienced unprecedented high demand, record absorption, and spiking rental rates coming out of the pandemic,” he told GlobeSt.com.

“Manufacturing shutdowns and supply chain disruptions during the pandemic coupled with increased consumer demand led to wide-spread inventory shortages causing many companies to shift from a ‘just in time’ delivery strategy to ‘just in case,’ resulting in expanded inventories and hyper demand for new bulk warehouse space.

“Although the Houston industrial market remains strong due to its large number of drivers such as petrochemicals, manufacturing, construction, international trade, and the Texas Medical Center, the pace of bulk leasing activity is slowing down, and sublease availability is rising.

“Higher interest rates and inflation are slowing the housing market and consumer spending resulting in downward pressure on distributors tied to the housing industry such as furniture and building materials. National and global economic uncertainty coupled with higher costs are also causing companies to delay projects or consolidate facilities as a cost-cutting measure.”

Year to date, Colliers said the market has recorded just over 635 transactions within bulk industrial properties and is well off the 2022 pace of nearly 1,200 transactions during the same period.

Third-party logistics and packaging companies (3PLs) are the primary occupiers through the first six months of 2023. The sector has progressively expanded its market presence, rising from 28.1% in 2021 to 29.8% in 2022 and reaching 32.9% in 2023.

3PL providers’ strength is their “adeptness at delivering cost-efficiency to businesses and mitigating the challenges posed by labor shortages,” Colliers writes.

E-commerce’s market share has contracted from 14.9% at the close of 2022 to a mere 7.4% in the first half of the current year – though it boasts the largest average square footage per transaction, at 438,659 square feet.

The subsequent sector in terms of size is motor vehicles, tires, and parts, boasting an average of 353,308 square feet.

Amazon remains the top occupant through the first half of 2023 and Walmart and Uline have notable activity in the Midwest, with over 75% of their 6.4 million square feet in this region.

Noel S. Liston, Managing Broker, Core Industrial Realty, tells GlobeSt.com that 2023 is shaping up to be a “very positive year” for industrial throughout the Midwest and the greater Chicagoland markets, but “certainly not near” the activity of the previous 2.5 years.

Chicagoland pricing has stabilized but retained the pronounced gains achieved during the pandemic, Liston said.

“While there has been a slowdown in bulk leasing activity, there has been consistent absorption and interest in other industrial spaces that would not be classified as “bulk” – due to size metrics or function,” Liston said.

“We are always looking at supply-demand metrics when we forecast the heath for industrial, due to zoning constraints, infrastructure, and population constraints, industrial will continue to perform as a winner,” he said.

“Geography plays a significant factor in determining lease up of industrial bulk warehouses, certain secondary or tertiary markets may experience softness if they are being overbuilt with speculative product.

“Interest rates do weigh on the overall health of the industrial market so we have to wait and see what transpires with the tapering of the Fed tightening cycle. Overall, we remain optimistic on industrial due to a relative balance in the supply/demand factors as well as the strong employment numbers that keep our domestic economy moving forward.”

Adam Roth, executive vice president, industrial services, NAI Hiffman, tells GlobeSt.com his firm is also bullish about market conditions, particularly as construction slows and competition for space picks up.

“The prior pace of expansion wasn’t sustainable long term, so the year-over-year declines are actually a positive sign that points to healthy and measured growth in the years ahead,” Roth said.

Chicago’s industrial market vacancy rate stood at just 4.2% in second-quarter 2023, according to NAI Hiffman research, with 36 million square feet of new product under construction.

“That’s expected to slow because of higher interest rates and construction costs,” Roth said.

Keyvan Ghaytanchi, Chief Investment Officer at BEB Capital, tells GlobeSt.com, “The key to a successful investment strategy lies in understanding the shifting dynamics and regional variations. The potential headwinds provide challenges and opportunities. These will highlight the value of regions with supply constraints where opportunities will be more pronounced, as well as sectors that continue to show resilience,” such as 3PL providers.