We’ve all heard about the global supply chain crisis that’s holding up shipping at ports across the country. There have been several clogged ports with an overwhelming number of cargo ships on the western and eastern shores. They’re holding everything from patio furniture to clothing and luxury goods, making the warehouse shortage even worse.
This problem creates a sharp demand for industrial real estate. Peter Schultz, the Executive Vice President of First Industrial Realty Trust’s east coast region, a company that specializes in industrial real estate, has been in the business for over 35 years.
“Our market, we’re seeing insatiable demand from tenants; we’re seeing rents at record levels,” Schultz said. “That’s in part because land values are rapidly escalating, and construction costs are escalating, too. This is the best time in the business I’ve ever seen in the past 37 years for industrial real estate.”
In fact, purchases of apartment buildings, life-science labs and industrial properties (many of which serve as e-commerce distribution centers), has skyrocketed commercial sales up 19% this quarter, compared to the same quarter in 2019. According to a report from real estate data firm Real Capital Analytics, this is the biggest quarter for commercial property sales ever.
The chain of product creation, storage and shipment is dependent on the construction of warehouse spaces and how quickly tenants can move in. Only certain types of products can sit in loading containers in parking lots, when they’re maxed out of warehouse space. Food and beverage delivery companies are the first to suffer.
“Companies today, it’s about net growth and rebuilding their supply chains,” said Schultz, who recently spoke at the Commercial Real Estate Development Association’s conference in New Jersey. “E-commerce is a huge tailwind for our business, the pandemic accelerated some of that growth. Now that we’re in a time when people can go back into stores, e-commerce is up and keeps on chugging.”
As far as industrial real estate trends go, it will be more of the same in 2022. “What we are doing on the ground today and where we are going over the next year or 18 months, are part of the snapshot of the east coast region like right now,” he said. “The data, we think, is here to stay.”
Looking at the demand across the country, Schultz believes that the net absorption is going to exceed supply by about one million square feet or so, meaning that more commercial space was leased up than was made available on the market.
“That’s extraordinary,” Schultz said. “We will see how it shapes up in 2022, but we’re seeing record low vacancy rates, about 4% nationally. It’s lower in high barrier markets like New Jersey, southern and northern California, Seattle and Miami. These markets are very tight; they’re very land constrained. We see that the rent rate continues to accelerate.”
In October it was reported that Amazon’s labor shortage hinders their one-day delivery services as part of their Prime loyalty club.
But it isn’t just labor, nor supply chain issues. It’s getting the right elements to build warehouses, too. From steel to roofing materials, dock levelers, ventilation materials and roof fasteners, there’s a capacity issue with all of those aspects.
“A big part of the problem is the ports are full of containers and they can’t get the containers out to the retailers or the manufacturers,” Schultz noted.
For example, the ports in California are having cargo containers stack up at their terminals. Some companies are being forced to face fines, to help alleviate a backlog of the supply chain.
Many ports across the country are still jammed with shipping containers, and some reports claim they’re filled with Christmas trees, electronics and heavy machinery from companies like Amazon, Walmart and Home Depot.
“The retailers have nowhere to put it, and the vacancy rates are so low, that they’re having to pay to store the containers at the ports until such time as they can get them,” Schultz explained. “You have empty containers waiting at the port to go back, it’s a big issue, it will get solved over some period of time. In the meantime, it is creating a lot of pressure for companies to find space. The post office is usually in the market for temporary space over the holidays. There is no space available.”
This trend affects how leases are made for industrial real estate space, as no landlord is going to do a short-term deal, given how much demand there is.
“We’ve seen the post office have to commit to five-year deals on a number of buildings around the country because they have to process all the demand they’re going to get over the holiday,” Schultz said. “Otherwise, people are going to be disappointed over the holidays, people can’t get things that are shipped.”
Schultz and his team at First Industrial have seen third party logistics providers who need more space. “Let’s face it: if a company doesn’t have stuff to sell, that’s not a good dynamic,” he said. “Companies need products to store, sell and fulfill for all of their orders. The supply chain issues are broad. Labor complicates those. The long road transportation shortage complicates it.”
First Industrial leases industrial space to Amazon, their largest tenant for revenue.
“E-commerce is a huge part of the demand equation, but so are food and beverage, traditional retailers trying to build out their distribution network,” he said. “It was a huge part of demand last year. Demand has outsized, compared to the early pandemic.”
One solution is First Industrial’s approach to leasing new buildings in places like Dallas, Denver and Phoenix, which the company develops on spec (building without a tenant). It speeds up the move-in process.
“Today we have over $700 million of investment underway of speculative buildings around the country,” Schultz said. “That’s up significantly, up from pre-pandemic average run. In response to this insatiable demand, we’re seeing that everywhere.”
But even that has been backlogged by the limited supply of steel (First Industrial has had to wait 12 months to receive steel, after the time of ordering it). That obstacle slows down the timing of constructing new move-in ready buildings.
As a result, some of the vendors are not holding promised delivery dates.
“Everything is taking longer,” he said. “Entitlement and approval on the front end, then the actual construction process. We’re focused on how we deliver those buildings; tenants don’t have a lot of choices so the level of urgency is up.”
With Black Friday and Christmas just weeks away, 2022 will likely also see a shortage of industrial space.
“Next year will be more of the same as to what we have seen in 2021, the continuation of insatiable demand,” Schultz predicted. “Rents will continue to grow. We’ll see higher rents next year versus this year.”
That rent spike will be intensified by the challenges of construction costs, the volume of construction and delivery schedules, which is going to get worse due to supply chain issues. “There is more demand for space than there are spaces,” he explained.
“The good news is that the supply chain issues will get sorted out, but it will probably take a few years. The ports can handle the volume, but it’s the customers, the end customer whose stuff that is,” Schultz said. “The supply chain is clogged.”
In other words, this issue is driven by the addition to all the stuff we buy online — it’s a huge amount of demand. “The sales inventory ratio is down; companies are trying to rebuild their inventories,” said Schultz.
“For years, it became just in time, now it needs to be just in case. You can’t sell what you don’t have.”