Warehouses to remain scarce and expensive despite new construction
E-commerce is the biggest contributor to today’s tight industrial real estate market, according to research from real estate management company Jones Lang LaSalle. Thanks to healthy consumer spending and growing e-commerce sales, the combined logistics and distribution and third-party logistics sectors are responsible for 24% or 21.8 million square feet of total leasing activity, according to the report “U.S. Industrial Outlook, Q1 2017.”
First quarter industrial vacancy rates fell in nearly three quarters of U.S. markets, according to the report. Vacancy rates declined by 30 basis points from the previous quarter to 5.3% and were at a 17-year low nationwide in the first quarter, forcing average rents up 10% year over year on the coasts; the top four markets with the highest year-over-year rent growth are Northern New Jersey, San Francisco Mid-Peninsula, Seattle and Inland Empire, JLL noted.
The first quarter saw a 29% increase over the fourth quarter in construction of build-to-suit properties, and, nationwide, there’s some 247 million square feet of new space on deck, a 10-year high. 224.5 million square feet were delivered in 2016, and JLL expects 2017 to be “another solid year; by 2018, nearly 1 billion square feet of space will have become available over the previous five years.
The market for industrial space is so tight despite the swiftly expanding capacity, according to JLL, and that could take retailers by surprise as they strive to boost online sales logistics and expand fulfillment centers as their leases come up.
“For cost-sensitive occupiers that need larger warehouse spaces, limited options of existing spaces are available on the market and they are likely to experience sticker-shock when renewing their rents,” JLL said. “In some markets, bulk buildings with strong touring activity will be able to command higher rents. In spite of this quarter-over-quarter increase in rents and the current high-water mark, pricing has not slowed tenant touring activity.”
That could help speed the convergence of industrial distribution and retail real estate spurred by the growth of e-commerce and the increasing emphasis on delivery speed and in-store pick-up noted in a recent report from Fitch Ratings.
As e-commerce continues to grow at the expense of brick-and-mortar retail, leading to tenant and retail property softness, the future of shopping centers and lower-quality malls is in question, but well-located retail properties and REITs with portfolios centered on consumer demographics will experience continued demand as centers for delivery and pickup services, Fitch said last month.
At this point, many retail stores, warehouses and e-commerce last-mile distribution centers share one thing in common — they essentially serve to distribute or stage goods for sale to the end user. One has a delivery focus without public access, the other has public access without a delivery function, Fitch noted. “Retail centers that exhibit the best demographics, which include per capita income and population density, will be most easily repositioned and most capable of managing the secular shift in how goods are sold and purchased in the 21st century,” Fitch said.
Owners of retail locations optimized as delivery and pickup sites will likely win in this environment. Because retailers and e-commerce distribution facilities are serving such a similar service — getting goods to customers — both should be analyzed similarly, according to Fitch. Mall values have long been measured by their proximity to population density and an area’s per-capita income, and that applies to any site’s ability to draw from consumer traffic and buying power.
“The old real estate axiom, ‘Location, Location, Location’ applies, possibly now more than ever,” Fitch said.
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