© Kamonrutm

With space in short supply and rents continuing to rise, US companies in need of warehousing are increasingly forced to look at facilities in second- or third-tier locations.

Warehouse vacancies in the US are at less than 4%, with little hope for improvement as the arrival of new facilities cannot keep up with demand and industry players expect no easing of the crunch before the end of next year.

“The need for resilience in the supply chain continues to drive record demand, despite today’s economic and geopolitical risks,” said Hamid Moghadam, CEO of logistics real estate trust Prologis.

The company reported 97.4% occupancy for the fourth quarter of 2021, and the pressure has not eased in the first three months of this year. Prologis beat its first-quarter expectations and raised its full-year guidance for net earnings by 10%.

Chicago-based real estate firm JLL recently tabled a research report, The Race for Industrial Space: Can Supply Keep Up? and its analysts found capacity is particularly tight in the major markets and distribution hubs, with vacancy rates near zero.

“Urban coastal markets, including Los Angeles and New Jersey, and inland distribution hubs, such as Salt Lake City and Columbus, have seen the lowest vacancies on record,” they wrote. “Many tenants are being forced to expand or relocate to secondary or tertiary markets, with vacancies at the lowest on record.”

They describe the current facility production pipeline as robust but unable to match the rise in demand, as companies continue to take on larger inventory positions to avoid supply shocks and stock-outs.

“While labour shortages and material costs are having a significant impact on the under-construction pipeline, deliveries are barely moving the needle on availability in the overall industrial market,” the report reads.

Completion of new facilities is hampered by delays from labour shortages, Covid-related restrictions and issues with supplies. As a result, construction timelines have stretched to two years, up from a historical average of nine months, which prolongs the tight supply situation, JLL found.

And the cost of building a warehouse today is 21% higher than a year ago, the report notes.

The supply shortage is exacerbated by the fact that a large part of the existing infrastructure is poorly suited to meet contemporary requirements. According to Prologis, over 25% of industrial buildings are more than 50 years old. JLL found the average age 42 years, and 75% of the existing supply built over 20 years ago.

Older logistics facilities typically have lower ceilings, fewer dock doors, limited trailer parking space and larger footprints, JLL wrote. This is not suitable for e-commerce, where new warehouses tend to have higher ceilings for mezzanine structures and higher stacking.

Prologis estimates that the US market needs 800 million sq ft (74.32m sq metres) of incremental warehousing space, citing an inventory-to-sales ratio 10% lower than before the pandemic and the elevated need for safety stock.

“We are in unprecedented territory,” said Mr Moghadam. “Industrial rents have never grown at these levels, but we’ve never had market conditions like we have now.”

Inevitably this translates into higher rents. Prologis forecasts rents in the US market to climb 22% overall, with coastal markets seeing increases of 25-26%.

According to JLL, industrial rents in the US have risen 37% over the past five years. For this year, the firm predicts increases of more than 8%, accelerating toward the end of the year.

To hear more about e-commerce, try the The Deep Dive 2 Podcast, 2022.

Clip 2 The importance of warehousing to e-commerce success – Cathy Roberson, president of Logistics Trends & Insights


Comment on this article

You must be logged in to post a comment.