Amid public market volatility and broad economic uncertainty, the fundamentals of investing in industrial development and logistics facilities (particularly state-of-the-art warehouses) remain strong. There are several reasons for this dynamic, primarily historically low vacancies in warehouse facilities, a decrease in construction of state-of-the-art industrial development, and continued high demand from users seeking to modernize their supply chains. Altogether, this presents an ideal environment for investing in logistics.
Leasing activity in 2022 remained particularly high, with the asset class posting approximately 865 million square feet. This represents the second most active year ever, and significantly above pre-Covid levels. More encouragingly, rents continued to rise across all size ranges due to the limited amount of vacancy across all markets, which sits at 3% and is very near the historic low.
Tenant demand has been particularly broad, with third-party logistics providers and retailers/wholesalers accounting for nearly a third of all leasing activity over 100,000 square feet. The the top five occupiers in 2022 were, in order: Amazon, Home Depot, Target, Lowe’s, and Geodis. The market is expected to continue to see occupier demand due to the combination of increasing e-commerce sales, onshore manufacturing, and supply chain reconfigurations.
Warehouse development – slowing construction starts amid an increase in rents and sustained high levels of demand
Warehouse development in the United States continues to decline due to the lack of available capital (as many institutional investors remain apprehensive about putting money into the market,) even as rent growth surged 18% in 2022. This presents an interesting opportunity for investors to enter the market.
It is estimated that industrial development starts will decline by 60% in 2023 to approximately 175 million square feet. Consequently, this will acerbate the acute shortage of modern and highly amenitized facilities that are needed. Due to this dynamic, rents will likely continue to rise in 2023. And because of reduced construction, construction costs are expected to level off or even decline in 2023.
E-commerce continues to drive demand
Continuing the economic sea change it brought about during the pandemic, e-commerce is a driving factor in the growth of the industrial and logistics market, particularly the need for more advanced warehouse facilities with modern amenities (excess car and trailer parking, clear heights, power, etc.) E-commerce sales continue to increase and goods sold online typically require about three times more warehousing space than goods sold through traditional retail channels. That trend is unlikely to change. Considering the growth projections of e-commerce, the supply of logistics facilities to hold it all must increase by 4% annually just to accommodate the demand.
To learn more about how and why to invest in industrial development, please contact Invest@cressetpartners.com.
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