Craig Meyer: Industrial Takes Off – But Not Everywhere

Warehouses of all sizes—particularly in the 500,000 square feet and larger range—are a hot commodity, and only getting hotter, according to JLL’s Big Box Outlook report. Featuring a new Big Box Velocity Index, the report finds that big box real estate market demand is strongest in traditional distribution corridors, especially in the Northeast, though investment and development opportunities can be found in many secondary markets too.

Below are a few trends driving the newly recovered industrial sector:

1. Speculative development is on the rise: With tenants now competing for what has become a limited pool of industrial and distribution space, vacancy rates are down to 8.1 percent (a five-year low) and speculation development and construction activity is way up. Of the 96.7 million square feet of industrial construction currently underway, about half is speculative with no tenant pre-leasing.

2. Retailers, especially e-commerce, continue to drive demand: Total requirements by retailers comprise over a third of today’s industrial real estate demand, with much of this driven by e-commerce – which is expected to double over the next few years.  This demand is reshaping industrial real estate and distribution strategies to include both highly-specialized commercial facilities such as mega-distribution centers as well as e-commerce fulfillment centers that can be as large as two million square feet.

3. Rising distribution activity is impacting size: More than half of the current tenant requirements fall into two size categories—the 250,000-499,000-square-foot range and the million-plus-square-foot range—indicating a resurgence in mid- to large-distribution activity and spurring 31 percent of the country’s speculative development. There is growing demand for space 750,000 square feet and above, and little in the way of inventory forcing a new demand for build-to-suits. On the other side of the spectrum, all markets have space to burn in the 100,000-249,999 square-foot segment.

4. Requirements up 43 percent in the Northeast, flat elsewhere: The Northeast emerged as the most active market, with five of the top six industries focusing their space needs in the region. Demand is centered in the midsize warehouse segment, as well as the million-plus segment. New Jersey led all markets across the country with tenant requirements for 500,000 plus square-foot spaces outweighing supply. Meanwhile, active tenant requirements for square footage are down by 26 percent in the Midwest, and flat in California’s Inland Empire—which accounts for 18 percent of the nation’s speculative construction.

Big box development is increasing to meet growing demand. But commercial real estate investors and developers are undertaking speculative construction at a more measured pace than during the last cycle’s peak, after becoming more attuned to the possibility of market corrections if new supply surpasses demand requirements.

Craig Meyer is President of Industrial Brokerage for Jones Lang LaSalle (JLL).