One of the most significant current commercial real estate stories is the industrial sector’s rise to the top of the pack, along with multifamily, as one of the two most desired asset types in demand by investors.
The pandemic created setbacks in the commercial real estate market in 2020 and 2021 and there are still lingering challenges, such as supply chain and labor supply issues. However, the outlook for 2022 remains very positive, and reflects the confluence of many factors which have significantly increased the demand for industrial real estate since the beginning of the pandemic and for the foreseeable future.
This is, in part, is due to the pent-up demand that began as the result of companies putting real estate plans on pause at the beginning of 2020. Now—two years later—in some core markets, warehouse/distribution, manufacturing and technology companies cannot find enough industrial space to accommodate their current and future business plans.
Several of the user-types driving increased industrial property demand are e-commerce companies and their suppliers, food and beverage companies (including refrigerated and frozen food products), pharmaceutical and medical-related companies and packaging and consumer products companies.
Many companies have been implementing a “plus one” facility strategy as inventory control has become a primary focus for industrial users. Therefore, increased warehouse footprints—to accommodate additional inventory due the recent and continuing supply chain disruptions and as an additional service to customers—has been an emerging trend.
In order to obtain some additional perspectives on industrial real estate in 2022-2023, I spoke with several of the most active industrial developers for their predictions for the next 12-24 months:
Nate Rexroth – Executive Vice President Asset Management, Centerpoint Properties
“The log jams experienced in 2021 at top ports like L.A./Long Beach and N.Y./N.J. have not abated since the Biden Administration announced steps to increase efficiency in December. Ships continue to queue in record numbers on both coasts. Worker shortages and rising fuel costs promise to continue spiking transportation costs and the prices of goods and raw materials for the foreseeable future. Construction starts promise to continue to be more challenging and costlier, too, in 2022. These factors all point to another year of tremendous demand and escalating rent rates for highly functional industrial facilities and properties in port-proximate and in-fill submarkets well into 2023. Users are increasingly looking to lock-in rents sooner rather than later to avoid getting priced out of the real estate they need to stay competitive.”
Katie Michel – Senior Vice President, Pritzker Realty Group
“We expect unprecedented delays in procuring construction materials, particularly pre-cast panels and structural steel to limit the level of new warehouse construction in 2022. Low existing vacancy and limited new inventory levels are expected to result in continued net rental rate growth with in-fill and high velocity submarkets experiencing the highest growth. Developers with existing land positions and those buying land today will be looking for creative ways to put that land into production before 2023 to meet the continued market demand. Developers are highly focused on locking in hard construction pricing to ensure they can hit their return thresholds. Volatile roofing insulation material cost is the most difficult commodity to lock in today.”
Brian Quigley – Executive Vice President, Conor Commercial Real Estate
“2022 will be a year of sticker shock for tenants in the market searching to lease a new building. Construction costs will increase in the neighborhood of 25 percent over projects delivered in 2021 and that cost increase will be passed along to tenants in 2022 in the form of significantly higher base rents. Cap rate compression will bottom out in the 4 percent range and that will impact developers who have reaped windfall profits from cap rate compression.”
Scott Gibbel – Vice President of Capital Deployment and Leasing, IDI Logistics
“Build-to-suits, as a percentage of new supply, will reach record levels in 2022 and 2023 as a result of surging occupier demand and longer development lead times. Rent growth will be as strong, if not stronger, than it was in 2021—double digit is my prediction. Construction costs will be more predictable, and we shouldn’t see any spikes in pricing like we did in 2021. Material lead times will be the story of 2022, surging demand and suppliers are still playing catch up.”
In addition to the prevailing challenges described above, as well as rising interest rates and the continuing pandemic impacts, potential development starts in metro Chicago will reach an all-time record of up to 34 million square feet. The upper limit on the amount of industrial product started by developers in 2022 will be governed by the capacity of precast concrete plants to produce and deliver wall panels, as well as other construction supplies, such as roofing materials, lumber and steel.
Users of industrial real estate will experience the following as they are negotiating a new lease, a lease renewal, property purchase or build-to-suit:
- Higher lease rates and sale prices
- Fewer available properties to choose from
- Annual lease escalations of three to four percent (up from two to two and a half percent)
- Much higher costs for property modifications and tenant improvements
- Shorter contingency periods for decision making and guaranteed pricing
Over the last few years, companies have been focused on making locational decisions leveraging new data sources and analytics, and they are selecting properties in strategic locations in order to attract sufficient labor and manage transportation costs.
Owners of property portfolios are also prioritizing locational decisions that are closer to population hubs to accommodate last-mile deliveries, as customers are demanding shorter and shorter delivery times.
We expect that 2022 will be a banner year for industrial real estate developers, users and real estate professionals. In spite of rising construction costs, labor shortages and escalating sale prices and rental rates, it appears that industrial real estate will continue to flourish for the next 12-24 months at, perhaps, record levels.
Thank you to Nate Rexroth at Centerpoint Properties, Katie Michel at Pritzker Realty Group, Brian Quigley at Conor Commercial Real Estate and Scott Gibbel at IDI Logistics for their insights.