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>>> National warehouse pipeline keeps expanding, but 30% of construction is in 4 markets

The U.S. industrial market is off to a busy start in 2022 as demand remains high for logistics, e-commerce and manufacturing space everywhere.


By Ashley Fahey

The National Observer: Real Estate Edition

Apr 25, 2022


https://www.bizjournals.com/bizjournals/news/2022/04/25/warehouse-pipeline-expanding-challenges-remain.html?ana=yahoo


The U.S. industrial market is off to a busy start in 2022 as demand remains high for logistics, e-commerce and manufacturing space everywhere.

Demand outpaced supply for the sixth consecutive quarter in the first quarter, with the U.S. market absorbing more than 108.7 million square feet of space in the first three months of the year, according to Cushman & Wakefield PLC (NYSE: CWK). That's an increase of 7.8% from Q1 2021.

Meanwhile, construction is trying to keep up with record-level demand, with 546.1 million square feet underway at the end of Q1, Newmark Group Inc. (NYSE: NMRK) recently found. In Q1, 81.1 million square feet delivered nationally.

And while seemingly every major U.S. metro area, and the tertiary areas around it, is seeing a big run-up in industrial construction, there are a few key markets where new warehouse space is dominating. Newmark found nearly one-third of all new industrial supply underway now is in Dallas, Phoenix, California's Inland Empire and Chicago.

Lisa DeNight, national industrial research director at Newmark, said markets like Dallas and Phoenix have the sites to expand their construction pipeline to meet demand, as opposed to a market like southern California, where the Inland Empire sits. Although a prime warehouse market because of its location near the ports of Los Angeles and Long Beach, the Inland Empire continues to be an extremely constrained market for space, DeNight said.

That's created new nodes of industrial growth, including places like Phoenix and Las Vegas, in addition to areas proximate to East Coast ports, such as Savannah, Georgia, and Charleston, South Carolina. In fact, Charleston is one of the top markets seeing the highest amount of industrial development as a share of existing inventory, according to Newmark.

Demand has pushed the U.S. vacancy rate to 3.3% at the end of Q1, according to Cushman. Among the markets tracked by Newmark, vacancy stood at 4% at the end of Q1. That's compared to 5.3% vacancy nationally a year ago.

DeNight said despite the continued demand and amount of new space under construction, and continuing to break ground, the sector remains challenged with the supply chain, costs and labor availability.

Newmark found while the industrial pipeline has grown 46% annually, space that delivered in the first three months of 2022 was only slightly above the rolling four-quarter average, which suggests challenges around timely delivery, DeNight said.

She said she was talking to a developer in the Mountain West region who said entitlements are now taking six months longer than they used to — and that's just one stage of the project.

"The supply-chain disruption isn't dissipating anytime soon," she added.

So what does it mean for new industrial development and the ability for groups to start and complete projects? DeNight said larger groups are most likely to be able to head off the broader economic challenges and have the least trouble delivering the space needed to meet demand.

San Francisco-based Prologis Inc. (NYSE: PLD), for example, one of the nation's largest industrial developers, completed more than $1 billion in new development in Q1 across 32 projects and 16 markets, Tim Arndt, chief financial officer at the real estate investment trust, said during the company's April 19 Q1 earnings call.

The build-out potential of Prologis' land bank is at $28 billion, or about 200 million square feet, he added, with nearly $7 billion of liquidity and more than $18 billion of investment capacity across Prologis and its open-ended funds.

Still, supply-chain issues are hitting major players, too. Ardnt said Prologis reduced its deliveries forecast for the year to 375 million square feet, citing developers' struggle to deliver on time because of a lack of materials and labor, a condition he said the REIT expects to continue throughout the year.

But, DeNight said, there are especially very real pressures for smaller, regional developers.

"This is a very geographically specific question as well," she added. "Some markets have such impediments to delivering new space — land constraints, very long entitlement periods, labor issues. In some geographies, it’s always a good idea to build more space, if you can. But I think some other geographies’ development landscape will need to be more considered in the next 12 to 18 months."

Although e-commerce and third-party logistics make up a significant share of the industrial market, advanced manufacturing is becoming more prolific, especially given the war in Ukraine and issues obtaining supply from China through the pandemic, which continues today.

Projects like Taiwan-based Sunlit Chemical Co. Ltd.'s $100 million facility in Phoenix, New York-based United Safety Technology Inc.'s $350 million medical-manufacturing facility in Baltimore and Indianapolis-based Eli Lilly & Co.'s (NYSE: LLY) $1 billion manufacturing plant in Concord, North Carolina, began in Q1 and are indicative of that kind of growing demand, DeNight said.

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