July 5, 2022 | Business insights
While 2022 may be a good year for industrial warehouse developers, the ongoing supply chain and shipping crisis make it a real catch-22. How can industrial warehouse developers navigate the future?
When we think about pandemic-related shortages, we usually first turn to semiconductor foundries, or the parking lot of container ships sitting off the California coast. However, physical industrial warehouse space has also become hard to find. With record-low vacancy rates worldwide, industrial real estate developers are scrambling to keep up with growing demand. Landlords of established spaces are posting record-high rents and rising trends in pre-leasing agreements. Companies relying on eCommerce-fueled sales have even begun leasing space in buildings still under construction—a not uncommon practice, yes, but one quickly trending upward as warehouse space becomes a hot commodity.
While 2022 may be a good year for industrial warehouse developers, ongoing supply chain and shipping issues make it a real catch-22. Building materials and available land continue to elude new developers. Furthermore, locals affected by the proposed sites have turned to protest against their construction. How can industrial warehouse developers navigate the future? Furthermore, what sort of challenges must they overcome in 2022, 2023, and onward?
Massive Profits on Warehouse Building (Come With Major Challenges)
Prologis, a giant in logistics real estate, noted some crucial metrics in the industrial warehouse industry. For starters, vacancy rates as of December, 2021 were at an all-time low of 3.9%—meaning roughly 96% of warehouses in America were leased and full. Furthermore, the company raised projections for inventory growth in the U.S. accordingly. Naturally, this prompts Prologis to build more warehouses. However, that task doesn't prove easy. According to Prologis, “logistics space in the U.S. is effectively sold out.”
To chase profits in the industrial warehouse sector, developers will have to swim upstream. Logistically, warehouses need to be close to consumers. However, those coveted metropolitan development plots near Atlanta, Chicago, and New York are scarce—if not completely sold out. Experts note that some companies will expand as far as 50 miles from their consumer base in search of space!
Developers who can get their hands on available land shouldn't have difficulty finding early lessors for a premium. According to CBRE, a leader in commercial real estate services, of the 190 million square feet of warehousing space under construction in 2020, 43% had already been pre-leased.
However, finding available land isn't as easy as showing up and planting your flag. Some companies struggle with the local residents who are opposed to industrial development encroaching on residential areas. They are, of course, well within their rights, especially when these warehouses drive significantly more trucks through suburban areas, leading to a multitude of community concerns.
Shortages on Building Supplies: Old News—But How Long Will it Last?
The continued shortage of building supplies proves to be yet another conundrum for industrial warehousing. The price of steel has only increased over the course of the last year, with no sign of letting up. Other material costs essential to commercial construction are also on the rise, as availability contracts.
Ken Simonson, chief economist at the Associated General Contractors of America, suggests that there’s no quick end in sight for these materials shortages. He predicts that the crisis in availability could even stretch into 2023. "I think it will be a very long time before we see things get back to whatever normal was before this," Simonson says.
Analyzing the Historic Growth and Planning Ahead
CRE developers can still capitalize on the market with some careful planning as conditions change. Investors are shifting towards the industrial real estate sector as hybrid workplaces and the eCommerce boom diminish office space needs. As mentioned, the shortage of land near purchasing power centers has driven primary construction into areas more accustomed to spillover. The demand for warehouse space is high—and, with a new influx of investor dollars, CRE companies can capitalize in unconventional land markets.
According to the Bureau of Economic Analysis (BEA), leasing activity is up 80% compared to pre-pandemic averages. Experts predict that such activity will remain consistent through 2025, lessening only marginally over the next four years (within a percentage point). Meanwhile, year-over-year rent for industrial warehouse space could grow at a rate of 6.7%, reaching about $11/square foot by 2025.
CRE developers looking to capitalize on those projections must compete with the 593 million square feet of industrial space currently under construction in the U.S. Some of top metropolitan areas seeing construction booms include Denver, Chicago, Dallas, Phoenix, and Atlanta. Meanwhile, land is incredibly scarce in prime coastal regions like Los Angeles and Miami, where supply shortages continue to hurt the market.
Some companies have decided to combat scarce land by building up instead of out. In the face of increased demand, Transwestern Development Co. raised the roof on one of their warehouses: from 14 to 36 feet. The additional space (about 150,000 square feet) opens up more leasing agreements without scouting new land.
Planning For the Financial Future of Your Business
Everything, including physical space, seems to be in short supply as we begin 2022. However, with long-term, fact-driven thinking, CRE developers can capitalize on the growing industrial warehouse market as eCommerce-focused companies practically beg for available space. A local financial partner such as Bank of Blue Valley, a division of HTLF Bank, understands the challenges, risks, and opportunities CRE investors and developers are facing in this evolving market. They understand the value of flexibility in the terms and structure, and offer customized solutions for each project with a commitment to delivering quick feedback and certainty of execution. With their knowledge and deep industry expertise, you’ll be set for success when the shipping and supply chain issues subside.