Surging for So Long, Industrial Sector Growth Now Starting to Level

Article originally posted on Globe St. on August 2, 2022

Five markets account for one-third of square footage in the pipeline.

Indications that the high-performing industrial market has hit a plateau are growing, according to a report by Newmark.

Factors include economic and geopolitical headwinds that have “incited a significant slow-down” in economic growth and uncertainties around prospective demand.

Newmark reported that just five markets have +30 million square feet under construction and accounted for one-third of total square footage in the pipeline — Dallas, the Inland Empire, Phoenix, Chicago and PA’s I-81/I-78 Corridor.

It expects that in coming quarters, “the deficit between net absorption and deliveries will tighten as demand likely softens back to pre-pandemic levels and deliveries rise in line with the record-high pipeline.”

Another struggle comes from the lowest space deliveries in nearly three years at 72 million square feet, due to continued labor shortages, increased entitlement periods and rising costs continue to impact timely deliveries, Newmark said, causing the “sheer volume of planned and delayed projects in the pipeline to be delivered from 2H22 through 2023 to ultimately culminate in rising vacancy rates.”

The national pipeline increased 12.5% quarter over quarter to 613.1 million square feet, accounting for nearly 4% of total inventory.

Consumer Preferences Shift from Goods to Experiences

Jonathan Needell, president & CIO at Kairos Investment Management Company, tells that companies are evolving from pandemic-era supply-chain strategies, which is cooling industrial space demand.

“While industrial users shifted their distribution practices to meet retail demand during the height of the pandemic, we are now seeing businesses reevaluate these methods as consumer preferences shift again from goods to experiences,” Needell said.

“A strategy we expect to stay in place is onshoring – or companies shortening the supply chain by producing and shipping more of their products within the US to avoid the backlog of overseas shipping. We are also witnessing a shift in focus from smaller last-mile delivery to larger bulk distribution.”

Florida Still Popular; Other Hot Markets Seeing Rent Drops

Brian Smith, JLL executive managing director, South Florida industrial lead, tells, “From our perspective we do not see the industrial market leveling off. We have seen a 50% rental increase from 2021 to 2022 and an additional 22% rental increase so far this year. Demand continues to outweigh supply and spaces lease almost immediately.”

Erin Sykes, chief economist, Nest Seekers International, tells, “Rents have been steadily rising and prices have stayed relatively stable up to a few weeks ago. We have begun to see real-time price drops throughout even the hottest markets.

“However, these won’t be reported in monthly round ups until August due to reporting lags. That said, with the 30-year average hovering around 5.5% and opportunity to capitalize on dropping price, I believe that buyers hold a stronger hand than renters at present.”

Some Industrial Space Concepts Outdated

Doug Ressler, from Yardi’s Commercial Edge Report, tells that investors are seeing a slowdown in e-commerce growth, logistics and fulfillment centers serving online retail which have accounted for a large part of the 159.6 million square feet of new industrial space that came online in the first two quarters of 2022.

“As has been the case for several quarters now, rents increased at a significantly faster pace in coastal markets, as high demand, tight vacancies and geographic constraints limiting further development continue to increase the disparity between supply and demand.

“Continuing the trends of the past two years, Southern California remains the most sought-after area. As a result, new tenants have to contend with the widest spread between in-place rents and new leases.”

Additionally, there’s been an ongoing move away from manufacturing toward a knowledge-based digital economy, Ressler said, and that has made the idea of the brick-and-mortar workspace (and the hierarchical structure that comes with it) seem outdated.

“From a lofty high-rise, a warehouse complex, or a sprawling suburban campus, the hallmark of office design to date has been insularity — e.g., the calculated sealing-off, both physical and conceptual, of the work environment from its immediate surroundings. To some extent, this is inevitable. Today, we can work-from-home, work-from-office, work-from-café, work-from-anywhere.”