Expect this year to be a strong one for the industrial sector in the Midwest, with the region needing an additional 275 million square feet of modern bulk warehouse product by 2025 to meet the demand from ecommerce sales.
That’s the good news from JLL‘s recently published 2021 Midwest Industrial Outlook report.
The big takeaway from the report? Ecommerce will continue to fuel the industrial market, and the Midwest’s location in the center of the country makes it an ideal location for new warehouse space for companies that need to ship their product across the country quickly.
Industrial developers, then, will be busy: JLL says that the 275 million square feet of modern bulk product needed by 2025 is about 17 million square feet more than what construction crews have built in the last five years.
It might be difficult to believe considering the impact that the COVID-19 pandemic has had on the United States, but the industrial sector does remain active in the country and across the Midwest. JLL’s report offers proof of this: According to JLL, 91 percent of respondents surveyed for the company’s industrial report said that they have seen a significant increase in interest from new developers and investors since the start of 2020.
This is good news for Midwest markets as 75 percent of respondents said they expect tenant requirements to increase by at least 15 percent in 2021.
Not all industrial product types, though, are created equal. This is clear in JLL’s report. According to JLL, industrial demand is clearly tipping toward new modern bulk product in the Midwest. JLL said that modern bulk has seen 234 million square feet of net absorption in the region since 2016. This accounts for 70 percent of overall net industrial absorption in the Midwest during this period.
How strong is the industrial market in the Midwest? JLL reported that 90 percent of survey respondents forecast occupier demand to increase in their markets. Just more than 70 percent anticipate that speculative development and groundbreakings will rise, too.
And an impressive 100 percent of respondents told JLL that there has been a noticeable increase in interest from both existing and new developers in the last 12 months. Jll forecasts that more than 1 billion square feet of new product is needed to accommodate ecommerce demand across the country by 2025. As mentioned earlier, the Midwest will need an additional 275 million square feet to accommodate this new demand.
The biggest Midwest player today? To no one’s surprise, it’s Amazon. According to JLL, Amazon has a significant presence in every Midwest market tracked by the brokerage. JLL says that Amazon is responsible for 95 percent of the leasing tagged as ecommerce in the region.
Amazon, though, isn’t the only company active in the ecommerce space. The report says that many 3PL firms, logistics operators and traditional retailers are also operating ecommerce operations. These three industries combine for 31 percent of overall modern bulk leasing. Overall, ecommerce and 3PL firms are responsible for 71 percent of modern bulk leasing in the industrial space since 2016.
As demand rises, so will asking rents. JLL says that 66 percent of survey respondents expect rates to rise by at least 5 percent in 2021. Since 2016, industrial rents have risen 2.8 percent a year on average.
In little surprise, 100 percent of survey respondents said that ecommerce continues to play a major role in supply and demand metrics in their markets. But in more good news, 65 percent said that 3PLs are noticeably more active now than compared with January of 2020.
Investors are eying the Midwest industrial market, too. A total of 91 percent of survey respondents said they have seen an increase in interest from both new and existing investors in their markets.
For the top 50 buyers in the Midwest, institutional product acquired totals $13.2 billion and 209.4 million square feet, according to the report. The top 50 sellers are responsible for $9 billion and 150 million square feet.
And for 2021? All of JLL’s respondents said that they expect sales volume and pricing to increase this year. More than half the markets are forecasting up to a 10 percent increase in both.
All Midwest markets expect cap rates to further compress. The average cap rate in the Midwest is currently 6.5 percent, with most modern bulk assets garnering a reduction of at least 50 basis points from the market average.