Category: Industrial

The Future of Industrial Real Estate: Trends for 2022 and Beyond

The shock of COVID-19 has exposed the fundamental importance of industrial and logistics real estate to the world.

This report explores key trends that will influence occupier, investor and developer engagement with the U.S. industrial market in 2022. Looking beyond, it introduces two concepts that have potential to radically expand the industrial market in the distant future.

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Space to Replace: Divergent Market Fundamentals Drive Office-to-Industrial Conversions

While the industrial market has soared, the office market has softened, driving the conversion of some office product amid shifting demand. This report explores which markets are experiencing office space redevelopment and how much, and details the considerations for investors and developers exploring office-to-industrial conversion opportunities.

Unprecedented levels of industrial demand across the U.S. have left tenants with a critical shortage of space options, reflected in an all-time low industrial vacancy rate of 4.6% as of the third quarter of 2021. Comparatively, the U.S. office market is contending with uncertainty in the post-COVID-19 world, and the pandemic has only accelerated obsolescence of some older, less-amenitized product. This divergence among asset classes is increasingly driving investors and developers to consider industrial redevelopment opportunities for some unproductive office properties. Since 2018, at least 45 office properties totaling 11.3 million square feet have been redeveloped or are in the process of redevelopment into industrial use. This observed activity is predominantly concentrated in markets where density and land constraints are driving forces resulting in perennially tight industrial vacancy. While office space generally costs significantly more to build than industrial and yields higher rents when occupied, the economics supporting industrial redevelopment in these regions are buoyed by exceptionally strong market fundamentals, particularly when compared to each metro’s office market, where office vacancies are roughly 10 to 18 percentage points higher as of third-quarter 2021.

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How warehouses are taking over the U.S.

For every Cyber Monday purchase, there is a warehouse employee packing up those soon-to-be presents.

The big online shopping holiday comes amid a warehouse shortage across the United States as distribution center vacancy rates are at all-time lows. Nearly 96% of existing industrial space is in use, according to commercial real estate services company JLL.

The U.S. may need an additional 1 billion square feet of new industrial space by 2025 to keep up with demand, JLL estimates.

“The industry is effectively sold out through the next year,” Chris Caton, managing director of global strategy and analytics at Prologis, told CNBC.

Rents are at all-time highs and pre-leasing rates have skyrocketed, which is when warehouses are leased before construction is even complete.

“The leasing volume is almost triple in some cases to what’s being built every year,” Mehtab Randhawa, senior director of industrial research for the Americas at JLL, told CNBC.

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U.S. needs more warehouses to handle record returns this holiday and in coming years, CBRE says

As much as $70.5 billion worth of holiday purchases this year are expected to be returned, real estate firm CBRE predicts.

With a record amount of returns projected to flow back to retailers this holiday season and in the coming years, the United States is going to need more warehouse space to handle them, according to a new report.

As much as $70.5 billion worth of holiday purchases this year are expected to be returned to companies by consumers, commercial real estate services firm CBRE forecast Monday. That will put additional stress on supply chains that are already working around the clock, at max capacity, to fulfill a surge in digital orders.

CBRE said the projected 73% jump versus a five-year average is largely due to more online shopping. E-commerce sales tend to have a much higher rate of return, up to 30%, than items purchased in stores. People buying apparel online, for example, might order two or three sizes to judge which one fits best, then send the others back.

“One thing we often overlook is what happens when that shirt of yours gets returned,” Matt Walaszek, director of industrials and logistics research for CBRE, said during a call with the media Monday. “It creates a lot of challenges and costs for retailers.”

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Despite a Steep Drop in Volume, Industrial Remains the Shining Star of the CRE Universe

The overall slowdown in investment sales activity that affected all commercial real estate assets in the second quarter is not expected to leave a lasting mark on industrial real estate.

The industrial sector has been deemed one of the top performing commercial real estate asset classes, due to low vacancy rates, rising rents in some markets and positive net absorption.

But despite solid fundamentals, investment sales volume in the sector decreased by 50 percent in the second quarter compared to the year before, to $10.3 billion, according to data firm Real Capital Analytics (RCA). According to David Bitner, head of Americas capital markets research at real estate services firm Cushman & Wakefield, in his team’s tally, industrial deal volume was down by about 43 percent in the second quarter compared to the same period in 2019 From the first quarter of 2020 to the second quarter, there was a 46 percent decline in industrial sales volume, he adds. Bitner attributes this to the slowdown in investment activity caused by the coronavirus pandemic beginning in March, as most deals across every property type went into freeze mode.

“We were already anticipating a slowdown on the industrial side pre-COVID-19. People were ready for that. But coming into the downturn, we were in such a fundamentally better place than in previous downturns,” says Carolyn Salzer, director and head of industrial research for the Americas at Cushman & Wakefield. “Rents are still growing… The market is a lot smarter this time around, and with the e-commerce acceleration, it’s causing such a strong demand in the industrial market.”

Net asking rents on industrial properties rose by 100 basis points quarter-over-quarter and 6.3 percent year-over-year to $7.96 per sq. ft. in the second quarter, according to research from real estate services fir CBRE. Rents on warehouse and distribution center properties rose by 5.6 percent year-over-year to an average of $6.68 per sq. ft. These rates are at all-time highs, according to CBRE research.

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Blackstone buys South Florida warehouse portfolio for $94M

The deal shows there remains strong demand for industrial properties in South Florida.

The industrial properties gained in value.

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U.S. may need another 1 billion square feet of warehouse space by 2025 as e-commerce booms

With more people clicking “buy” online, demand for industrial real estate could reach an additional 1 billion square feet by 2025, according to commercial real estate services firm JLL.

With online sales proliferating during the coronavirus pandemic, the U.S. is going to need more warehouses to store hoards of boxes and handle those orders.

Holed up at home, and with many bricks-and-mortar stores temporarily shut, shoppers have turned to their computers and smartphones to buy everything from fresh groceries to new home furnishings to pet toys. And even after the pandemic subsides, the trend of people buying more and more online is expected to stick around.

And so with more people clicking “buy” instead of venturing to the mall, demand for industrial real estate could reach an additional 1 billion square feet by 2025, according to a new report from JLL.

The commercial real estate services firm said that prior to the Covid-19 crisis, about 35% of its industrial leasing activity was related to e-commerce. But now, it said, as much as 50% of that leasing activity has already been tied to the online retail industry in 2020.

“The first quarter was our largest leasing quarter in three years,” said Craig Meyer, president of JLL’s Americas industrial division. “We’re seeing more pressure on [e-commerce companies] than the typical holiday season … to meet consumer demand.”

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How Will the Popularity of Online Grocery Deliveries Play Out for the Cold Storage Sector?

A surge in cold storage demand is expected to last. But exactly how it will play out is still an open question.

COVID-19 is impacting life in many unexpected ways, but it’s been a boon for U.S. online grocery sales.

“The interesting thing is COVID broke down the psychological barrier that had prevented many shoppers from buying groceries online, and in a post-COVID world this could transfer to cold storage demand,” notes Chicago-based Peter Kroner, research manager for industrial capital markets with real estate services firm JLL who recently helped his grandmother buy her groceries online for the first time.

With consumers now comfortable having groceries delivered direct to consumer (D2C) or buying online, pickup in store (BOPIS), disruption of the U.S. food industry is expected to stick. Kroner notes that three major U.S. retail grocery chains have already announced plans to launch free delivery of online sales by year-end. In addition, a Brick Meets Click/Shopper Kit survey found that 46 percent of shoppers plan to continue purchasing goods online, including groceries, post-COVID-19.

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Warehouse Giant Seeing Insatiable Demand from Amazon, Walmart

Prologis Inc. is seeing growing demand for warehouse space.

(Bloomberg)—Prologis Inc., the largest owner of warehouses in the U.S., is getting a boost as social-distancing pushes consumers deeper into the embrace of e-commerce.

Companies including Amazon.com Inc. and Walmart Inc. have an “almost insatiable” appetite for more warehouse space, Chief Executive Officer Hamid Moghadam said in an interview on Tuesday.

“We’re not seeing those guys slow down, they continue to be very active in making new deals,” Moghadam said. “The strong continue to be taking a lot of space.”

Prologis and Blackstone Group Inc. have gobbled up warehouses in recent years, betting in part that more and more shopping will move online. Still, e-commerce is a relatively a small piece of the warehouse business, which is more tightly tethered to the overall economy.

Even as the pandemic fuels job losses and batters the economy, the surge in online shopping, including for groceries, is keeping vacancy rates low at Prologis properties.

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Warehouse Giant Seeing Insatiable Demand from Amazon, Walmart

Prologis Inc. is seeing growing demand for warehouse space.

(Bloomberg)—Prologis Inc., the largest owner of warehouses in the U.S., is getting a boost as social-distancing pushes consumers deeper into the embrace of e-commerce.

Companies including Amazon.com Inc. and Walmart Inc. have an “almost insatiable” appetite for more warehouse space, Chief Executive Officer Hamid Moghadam said in an interview on Tuesday.

“We’re not seeing those guys slow down, they continue to be very active in making new deals,” Moghadam said. “The strong continue to be taking a lot of space.”

Prologis and Blackstone Group Inc. have gobbled up warehouses in recent years, betting in part that more and more shopping will move online. Still, e-commerce is a relatively a small piece of the warehouse business, which is more tightly tethered to the overall economy.

Even as the pandemic fuels job losses and batters the economy, the surge in online shopping, including for groceries, is keeping vacancy rates low at Prologis properties.

The company has grown rapidly through acquisitions, but Moghadam doesn’t see buying many opportunities amid the current turmoil.

“I don’t expect anywhere near the kind of opportunities that came in other cycles,” he said. “I don’t expect fire sales.”

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