The onset of the COVID-19 pandemic posed a massive challenge to every link in the global supply chain, from factories and ports in China, to manufacturers, warehouses, grocery stores, and medical providers in the U.S. One result of this is the accelerated demand for industrial and warehouse space. With a newly increased focus on supply chain resilience, the emphasis has switched from just-in-time to just-in-case inventory. Proximity to consumers and execution of last-mile delivery are more important than ever. U.S. industrial vacancy ended the third quarter at 5.7%, relatively unchanged from one year earlier, but continued strong demand should push vacancy even lower by year-end 2020. Scarcity of product is evident, as nearly all markets surveyed report single-digit vacancy. Heading into 2021, Memphis, Cleveland and Philadelphia remain among the tightest industrial markets in the U.S. Given the supply-demand imbalance, the consensus is that rents will rise further. Los Angeles, Silicon Valley, and the San Francisco Peninsula posted the highest average asking gross rental rate for industrial space in 2020; while Dallas, Austin, and Philadelphia recorded the largest increases in rates during the year.
To meet demand, development has been robust in some markets. An estimated 235.2 msf was under construction during the third quarter, led by Dallas (28 msf), Atlanta (26 msf), Chicago (22 msf) and Inland Empire (20 msf). Nevertheless, construction currently underway represents a mere 2.3% of the national industrial stock. Of this space, approximately 40% is preleased. By comparison, only 23% of industrial construction had been spoken for during the same time period in 2019 – another indicator of burgeoning demand.
Ongoing pressure for supply-chain efficiency, an uptick in e-commerce, and proximity to growing urban centers have brought the industrial and retail sectors together. The pandemic accelerated a consumer shift toward online shopping, driving demand for logistics locations close to population centers to facilitate more efficient delivery. The growth in online purchasing has also led to the rise of “reverse logistics,” the need to facilitate an increase in the number of returns. This will continue to drive demand in the logistics sector through the remainder of 2020 and into 2021.
The strength of demand for scarce, well-located industrial property, combined with the relative weakness in certain parts of the retail sector have accelerated a trend toward adaptive reuse; and retail-to-industrial conversions was a trend witnessed in 2020. For distributors focused on last-mile delivery, underperforming malls and vacant big box retail centers present enticing locations in urban cores where land constraints and high land values have limited development opportunities in the past. Though they are often not straightforward to execute, look for these to continue into 2021.
Scarcity of product is evident, as nearly all markets surveyed report single-digit vacancy. Heading into 2021, Memphis, Cleveland and Philadelphia remain among the tightest industrial markets in the U.S.
Pandemic-induced e-commerce has not been limited to goods. Consumers have also increased onine shopping for groceries and pharmaceuticals, driving demand for cold-storage facilities. This is a relatively rare assets class and typically development of such centers is done on a build-to-suit basis. With online grocery shopping showing no signs of slowing, opportunities to convert dry to cold storage should play out in the coming year.
The onset of COVID-19 disrupted the global flow of goods, leading many companies to seek resiliency through geographic diversification, particularly as a hedge against supply chain risk in China. This accelerated a trend we’ve watched take shape in recent years—one that has been a catalyst for supply demand in the southeastern U.S. Atlanta, Charleston, Savannah, Greenville, and Florida have all seen major growth in distribution centers as companies adopt a regional strategy adding additional sites near growing population hubs with shortened delivery times and lower domestic transportation costs.
The industrial sector should continue to thrive in 2021, benefiting from high occupancy and strong rental rate spreads (especially on renewals) in the major markets throughout the U.S. – including the Mid Atlantic, which serves as a distribution hub for much of the eastern U.S. Sound fundamentals will continue to underpin the supply-starved market as major urban regions remain magnets for e-commerce-related warehouse and logistics operations.
Pandemic-induced e-commerce has not been limited to goods. Consumers have also increased onine shopping for groceries and pharmaceuticals, driving demand for cold-storage facilities. This is a relatively rare assets class and typically development of such centers is done on a build-to-suit basis. With online grocery shopping showing no signs of slowing, opportunities to convert dry to cold storage should play out in the coming year.
The onset of COVID-19 disrupted the global flow of goods, leading many companies to seek resiliency through geographic diversification, particularly as a hedge against supply chain risk in China. This accelerated a trend we’ve watched take shape in recent years—one that has been a catalyst for supply demand in the southeastern U.S. Atlanta, Charleston, Savannah, Greenville, and Florida have all seen major growth in distribution centers as companies adopt a regional strategy adding additional sites near growing population hubs with shortened delivery times and lower domestic transportation costs.
The industrial sector should continue to thrive in 2021, benefiting from high occupancy and strong rental rate spreads (especially on renewals) in the major markets throughout the U.S. – including the Mid Atlantic, which serves as a distribution hub for much of the eastern U.S. Sound fundamentals will continue to underpin the supply-starved market as major urban regions remain magnets for e-commerce-related warehouse and logistics operations.
For distributors focused on last-mile delivery, underperforming malls and vacant big box retail centers present enticing locations in urban cores where land constraints and high land values have limited development opportunities in the past.
