National Industrial Overview
- The health crisis had a major impact on industrial tenants. The requirement to social distance led to a surge in e-commerce sales, necessitating expanded operations for greater direct-to-consumer deliveries. Intermittent closures of production facilities and ports has also fostered extreme backlogs in the global supply chain. Long lines of cargo vessels waiting to be unloaded has put pressure on major ports to expand, as well as distributors and retailers to augment their warehousing space. Some shipping has been diverted to smaller ports, boosting space demand.
- The surge in demand is producing historically strong property performance metrics. A record 520 million square feet was absorbed on a net basis in 2021, as vacancy fell to a multidecade low. A robust appetite for space will push vacancy even lower this year, despite the largest construction pipeline since at least 2000. Approximately 420 million square feet of industrial space will be delivered this year, with developers focusing on larger properties. Buildings under 100,000 square feet in size comprise only a small amount of arriving space. The difficulty in developing smaller facilities closer to population centers, paired with the avid demand for such projects, will continue to apply upward pressure on rents.
Industrial Investment Outlook
- Investors have taken note of the sector’s benchmark-setting performance fundamentals, leading to an all-time high number of industrial assets changing hands last year. Institutional buyers with experience in other commercial properties are now entering the industrial landscape, as part of diversification strategies.
- The considerable demand for properties has driven the average sale price in the United States up by over 35 percent since 2019 to $133 per square foot entering this year. As prices climbed, cap rates have compressed. The mean yield across the country was in the mid-6 percent range as 2021 came to a close, with top-tier assets in the most sought-after locations changing hands with initial returns under 4 percent.
- Ongoing, elevated inflation is applying upward pressure to interest rates. The rising costs of capital are narrowing transaction margins, which may prompt owner-users to make new arrangements. More companies may opt to enter into a sale-leaseback now, locking in a long-term lease at more favorable terms than where lending rates are currently trending.
Modern Consumption Trends Underpin Industrial Facilities as an Increasingly Essential Property Type
- Pandemic-accelerated distribution and warehouse needs still growing. The health crisis had a major impact on industrial tenants. The requirement to social distance led to a surge in e-commerce sales relative to in-store shopping, necessitating expanded operations for greater direct-to-consumer deliveries. Demand increased for both large distribution centers that could serve whole regions, as well as smaller infill locations closer to where consumers live to facilitate rapid delivery.
- Record development not able to exceed hearty tenant demand. The shift in industrial space needs, propagated by COVID-19, has had a profound impact on property fundamentals. A record 520 million square feet was absorbed on a net basis in 2021, fostering an equally noteworthy level of rent growth as vacancy fell to a multidecade low. A robust appetite for space will push vacancy even lower this year, despite the largest construction pipeline since at least 2000.
2022 National Industrial Outlook
- Mismatch between production and transport capacity continues. Production output, at least within the United States, has returned to levels recorded before the health crisis; the amount of tonnage being transported by truck, however, continues to lag. A shortage of drivers is constraining the ability to transport goods across the country. If this dynamic persists, it may solidify businesses’ plans to shore up inventories.
- Airports gain even more logistical prominence. An expectation of rapid delivery, established pre-pandemic, has collided with prodigious backlogs at major cargo terminals. In order to transport some goods more quickly, companies have turned to airfreight. The volume of cargo transported by air has increased throughout the health crisis, underscoring demand for distribution and warehouse space at inland airport hubs.
- Advanced manufacturing driving new space needs. The recent supply chain disruptions may prompt more firms to bring their production processes closer to home in the years to come. Advanced manufacturing is already making a prominent return to the U.S. in the form of new semiconductor plants situated across the country, as well as electric vehicle production. The numerous support businesses will fill space nearby.
Sources: Marcus & Millichap Research Services; American Council of Life Insurers; Blue Chip Economic Indicators; Bureau of Economic Analysis; Commercial Mortgage Alert; CoStar Group, Inc.; Irving Levin Associates; Moody’s Analytics; Federal Reserve; Foresight Analytics; Mortgage Bankers Association; Real Capital Analytics; RealNet; Standard & Poor’s; PNC Healthcare; The Conference Board; Trepp; TWR/Dodge Pipeline; U.S. Bureau of Labor Statistics; U.S. Census Bureau; U.S. Department of Health and Human Services; USGS; U.S. Securities and Exchange Commission; U.S. Treasury Department.
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