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Double-digit increases in e-commerce sales volumes, expansion of the third-party logistics (3PL) industry and the fact that demand is outpacing supply made warehousing space a hot commodity in 2021 and 2022. The momentum has yet to let up, and it appears that this corner of the real estate market is primed for more growth and demand as we move into the new year.
Unlike the office sector, which suffered as a result of the move to remote work, and housing, which is now feeling the impacts of high mortgage interest rates, industrial space isn’t always readily available, yet there is big demand for it. This dynamic continues to push up lease prices while driving down availability, making it difficult—and expensive—for companies to expand their warehousing, distribution and fulfillment footprints.
Bucking the Headwinds
According to Jones Lang LaSalle (JLL), even the loss of momentum in the macroeconomic environment did little to erode the industrial market’s power this year. And while industrial leasing activity fell slightly during the third quarter of 2022, the market showed signs of resiliency with approximately 134.3 million square feet of deals signed during that three-month period, JLL reports.
“Overall, industrial markets continued to constrict, posting the seventh consecutive quarter of declining vacancy, bringing the rate to 3.3%, an all-time low,” the company continues. And as those vacancy rates continue to shrink, development figures are currently in line with demand. There is currently 633.8 million square feet of new warehouse space under construction, JLL says, which represents an uptick over the second quarter of 2022.
“Amid economic uncertainty and rising inflation, pre-leasing rates are not as strong as last year, but pre-leasing activity is still happening,” JLL states in its reports. “[During the third quarter], 138.2 million square feet of new industrial product [was] delivered to the market, marking a nearly 27% increase from the previous quarter.”
Based on its projections for e-commerce growth over the next two years, JLL predicts that an additional $900 billion in online sales will equate to demand for more than 1 billion additional square feet of industrial real estate space by 2025. And with U.S. e-commerce sales primed to hit the $1 trillion mark this year—a 9.4% increase over 2022—those projections may be right on target.
Just a Bump in the Road
In September, Amazon announced that it was abandoning completely or delaying the opening of dozens of distribution facilities across the country. Bloomberg reported that the e-tailing giant either shuttered or killed plans to open 42 facilities totaling almost 25 million square feet of usable space. Amazon also delayed opening an additional 21 locations, totaling nearly 28 million square feet.
Amazon’s big announcement did little to thwart the industrial sector’s momentum. Despite the pullback announcement, Commercial Observer says shipping and logistics “continue to drive the development pipeline.” With nearly 350 million square feet already being delivered this year (through October), it adds, the national vacancy rate has also steadily fallen throughout the year.
More to Come in 2023
Looking ahead, Multichannel Merchant’s Mike O’Brien says the domestic market for industrial space—which encompasses both retail and e-commerce distribution and fulfillment centers—won’t see an appreciable increase in new facilities until the first half of 2023. Citing a recent CBRE report, O’Brien says there’s currently a record 626 million square feet of industrial space under construction.
“The amounts landlords are asking for commercial rents are up 14.9%, while actual ‘taking’ rates from signed leases rose 18% from the prior year as demand continues to outstrip supply,” O’Brien writes, noting that the markets with the lowest vacancy rates tend to be located along the nation’s coasts, near transportation hubs or near the fastest-growing metro areas.
