No End In Sight For Industrial Boom As 'Off The Charts' Demand Continues
Activity in the logistics and warehouse sector keeps accelerating, and construction crews seem likely to keep breaking ground on new projects no matter what obstacles appear for the rest of the economy. Developers are already breaking Chicago-area records for new construction, while tenants keep popping up, ready to lease new buildings almost as soon as they appear.
Elion Partners last week became the latest developer to hit the accelerator. It launched a $1B partnership with Brookfield Asset Management to develop up to 15M SF of additional industrial properties at its Elion Logistics Park 55 in southwest suburban Wilmington. And experts say more such announcements are likely in the months and years ahead.
“I have always tried to [forecast] the end of a cycle, and in the past, I would usually say, ‘We’ve got another year, and that’s it,’ but in this cycle, I don’t see an end approaching,” Colliers International Executive Vice President Mike Senner said.
The Chicago region is not an outlier, he added. All the major distribution and logistics hubs, including Dallas, Atlanta, New Jersey and many others, are also seeing bursts of development. And although much of the boom in the past two years was driven by the need to serve millions of consumers left homebound by pandemic-driven shutdowns, the good times for logistics should last long after Covid-19 recedes. Shoppers found out how easy it was to order goods and deliveries online with a few clicks, permanently altering consumer behavior and sustaining the long-term need for modern warehouses.
Multiple records were broken by Chicago-area industrial developers and tenants in the second quarter of 2021, according to Colliers. By the end of June, more than 30M SF of buildings were under construction, eclipsing the previous record of 29.6M SF hit at the end of 2020 and marking the first time that number exceeded 30M SF. And tenants leased about 5.1M SF in spec buildings delivered since 2013, the most ever. That helped push down the overall vacancy rate to 6.29%, continuing a nearly five-year decline despite 60M SF of spec space coming online during that period.
Builders see similar activity in markets across the U.S. In New Jersey, developers are on a record pace, with 57 properties totaling 15.4M SF currently underway, according to Colliers. And the constant expansion of e-commerce and logistics means tenants are keeping pace with the many groundbreakings.
“The risk of overbuilding remains low considering the industrial market recorded 16.5M SF of occupancy gains over the last year and tenants have demonstrated their appetite to lease sites before a shovel enters the ground,” Colliers wrote in its second-quarter report on that market.
“I am constantly getting calls from clients who say they need to expand,” Premier Design + Build Group Director of Project Development Alexis Graziosetta-Tobias said. She works primarily in the northeast region of the U.S.
With millions of consumers now depending on e-commerce firms to ship common household items previously bought in shopping malls or grocery stores, the logistics sector has built-in demand drivers that will float it through recessions, she added.
“There is no way the demand won’t be there because these are the things we use every day,” she said. “As long as the population keeps increasing, and residential areas expand, I don’t see how [logistics] takes a hit.”
All this activity has investors sitting up and taking notice. Silver Creek Development, a Beverly Hills-based investor, bought a three-building, 2M SF complex at Elion Logistics Park 55 for $130M earlier this year, according to The Real Deal. That was the second most lucrative industrial deal in the Chicago region, surpassed only by the $176M KKR paid in 2020 for a pair of Amazon warehouses in Kenosha, Wisconsin.
The competition among investors will likely increase in the coming year, according to Senner, as long as the properties are in core submarkets, and have reasonable rents from creditworthy tenants. In the past several years, cap rates for such Chicago-area properties when purchased were around 4.65%, and have been dropping over the past six months. In 2022, competition should send rates even lower.
“You’re going to see deals under 4%,” he said.
Investor interest is even fueling an expansion of food-related cold storage buildings, which are far more expensive than typical warehouses, Berger said. Most new logistics spaces cost about $90 per SF to develop, but today, cold storage buildings can cost up to $220 per SF.
High costs helped leave the U.S. with a shortage of large, modern cold storage buildings, she added. About 78% of the existing buildings were built before 2000, but with the popularity of online grocery shopping, that could change.
Sales of cold storage buildings hit $3.3B in 2020, a 22% increase over the previous year, according to a Colliers report that used Real Capital Analytics data. Overall commercial real estate sales fell 29% in 2020.
Berger’s firm currently has three major renovations underway in the cold storage space and is also working on getting a new building underway.
“We’ve never been busier,” she said. “It’s wonderful, and I’m extremely grateful.”