Inside the Lucrative Land-Constrained Logistics Markets

Local market conditions are more indicative of the health of logistics real estate, more so than higher interest rates and tight lending conditions, according to a new report from CBRE.

The firm said that markets most at risk face both high availability rates and robust construction activity.

However some markets—including Las Vegas and Charleston—have been better able to absorb new product. The common factor in this group is that they are land constrained. 

“Land-constrained logistics markets are the hidden treasure chests in prime locations, sparking intense competition for existing properties and can be driven by repurposing of old industrial sites,” Paty Perman, principal, director of client operations, industrial, Avison Young, tells GlobeSt.com, “These markets, located near major urban centers and transport lifelines, offer strategic advantages like finding a shortcut in a complex maze, significantly cutting down transportation time and costs.”

Sometimes determining whether a market is land-constrained or not is not easily apparent. 

For example, Perman said she thinks Savannah’s industrial market is not as land-constrained as one might think, due to the Port of Savannah’s inland positioning.

“This enables strategic development along major interstates and expansion in rural areas, fostering room for efficient and cost-effective industrial growth,” Perman said.

“The same rings true for Charleston. Amidst rising interest rates slowing development and preventing overbuilding, the Charleston industrial market, constrained by its interstate access, is seeing companies value the strategic location of the South Carolina Ports Authority and opt for locations that offer balanced access to both Charleston and Savannah Ports.”

Most land constrained markets do have some features in common, though, namely that they are in densely populated urban areas with robust transportation infrastructure, according to Susan Bergdoll, senior vice president and partner for the Midwest industrial region at CRG.

“It makes sense that those markets are experiencing sustained demand for industrial space,” she said. “Consumers now expect and rely on same- or next-day delivery of products, especially food and daily necessities, which will continue to fuel demand for logistics facilities near major cities.”

These markets are also fairly immune to a pull back in tenant demand. For example, although Riverside, Calif., has seen a notable increase in availability this year due in part to price-sensitive tenants pulling back from the market, a risk of overbuilding is unlikely to emerge. The resulting picture has not been pretty. 

“Physical limitations, such as a lack of space, and abstract challenges, like prolonged timelines required for obtaining site entitlements, have substantially lessened the available land inventory that can support large distribution buildings,” Rick John, Executive Vice President and Ontario Branch Manager at DAUM Commercial, tells GlobeSt.com.

“Depletion of zoned land and the mounting pressure from municipal authorities on the entitlement process, there has also been a growing movement aimed at reducing truck traffic in the region. These compounding concerns offer little prospect of potential relief for the entitlement process. If anything, restrictions may continue to tighten as distribution buildings are major contributors to this traffic.”

Some markets are evolving into land-constrained markets due to scarce labor. That is what is happening in the Greater Chicagoland industrial market, according to Noel S. Liston, Managing Broker, Core Industrial Realty. 

“The critical impact that labor constraints are having on manufacturing, distribution, food and beverage, and service-related industries severely restricts industrial development in unestablished secondary and tertiary markets,” Liston told GlobeSt.com.

Meanwhile, the established eight major submarkets within the broader Chicago land industrial base continue to benefit from their access to labor pools and all the associated infrastructure that serves these submarkets, he said. 

He said that with a strong occupancy rate in place and a balance of supply and demand within these established industrial submarkets as well as extremely limited virgin land opportunities, the existing industrial portfolios are positioned to continue to perform well moving forward.

“Due to labor concerns as well as the relative affordability of industrial rents within this region, there will likely be more redevelopment within these submarkets than new development outside of these markets,” according to Liston.

“Factor in zoning considerations within the greater Chicagoland area and these submarkets are very well positioned to withstand most any risk associated with current lending concerns that may be impacting other asset classes and or some industrial assets in secondary or tertiary markets.”

Infill industrial-zoned land is another example of this category, according to Avery Dorr, vice president at Stonemont Financial Group in Atlanta.

“Most of the easy-to-develop ‘shovel-ready’ sites have already been developed,” Dorr said.

“In many locations, we struggle to achieve the proper zoning and entitlements. In the few cases, where we do find proper zoning and entitlements, there are many site-specific issues that must be resolved, including but not limited to protected wetlands – where we must go through the mitigation process which takes 12 to 24 months – environmental remediation, protected species, the availability of adequate off-site utilities, and access, such as turn lanes and roadway infrastructure.”

The scarcity of infill land, along with an increasing municipal reluctance to approve new projects, can be frustrating to developers as these locations are the most resilient throughout business cycles and will continue to provide outsized rental growth, Alex Olshansky, Head of Investments at Zenith IOS, tells GlobeSt.com. “You can see this demonstrated in the variance in the current performance of submarkets – across the board, the submarkets with the highest levels of vacancy are on the outer periphery of metro areas where there are less supply constraints.”