Back in early 2021, I talked a bit about why it was probably a great time to begin rethinking our industrial real estate holdings. This insight was based on a fantastic presentation about industrial real estate as a competitive weapon by my colleague, Todd Steffen, Vice President, Supply Chain & Real Estate Advisory Services at Colliers International.
It turns out that many organizations took that advice to heart throughout the remainder of this very unusual year, and we are now seeing vacancy rates in industrial real estate at all-time lows in the United States!
Mr. Steffen recently presented to our SCLA Think Tank group again to share a timely update on what’s happening—and why—in the white-hot industrial real estate market. I wanted to take a few moments to share some of my own insights in light of this unique situation we’re finding ourselves in right now.
The Trend: No Vacancy
Across the US, it’s turned into a “landlord market.” This is especially pronounced on the coasts, but industrial real estate is in a veritable “no vacancy” status everywhere. Mr. Steffen cited reports from Colliers with the following statistics: NY/NJ has vacancy rates around 2%, while LA is at 0.9% vacancy! In the South, Dallas is under 6%. (Nationwide, the average rate is around 4.5%.)
And we can’t build new industrial space fast enough. Vacancy rates continue to decline while we’re hitting record construction numbers. The under-construction number is currently around 477 million sq ft nationwide.
For example, we took a look at the southern US (where there is more space to build in many areas than in the already heavily built-up coastal port regions.) Of the 26 markets in the South, 17 have at least 1 million sq ft under development, led by Dallas. This is a dizzying amount of industrial construction, but that space is also being consumed as soon as it’s ready for occupancy.
Net absorption—the amount of new space being occupied as organizations move from a smaller to larger building or as brand-new construction comes online—is as high as it’s ever been by significant amounts! 400 million sq ft has been absorbed in 2021 so far. And, things are so hot in industrial real estate that if we added 500 million sq ft to the US market, it still wouldn’t drive vacancy above 5%.
There are two interesting drivers of this market, one of which has bubbled up to the top of the media’s radar lately (well after our supply chain industry colleagues began sounding the alarm): trouble at the ports thanks to the pandemic. The other is a newer trend that’s building in the background.
By now, we’re all familiar with the fact that our nation’s largest ports are entirely backed up, and this issue doesn’t seem to be going away.
As a response, some organizations are turning their attention to developing inland ports to ease transportation pressures and create more capacity. Inland ports rely on rail lines and allow companies more flexibility in utilizing containers. After all, trucks picking up containers at coastal ports has proven to be an inefficient solution to keeping containers moving through the supply chain quickly. And now we also have a truck driver shortage.
There’s no question that transportation has turned into a huge risk, so while rents have been going up with the trend of slim vacancies, organizations don’t mind paying if they can achieve less transportation risk or cost.
Nearshoring into Mexico
Another lesson we’ve learned through the pandemic is that moving production out of Asia is probably a good idea. While this is an expensive proposition, of course, “nearshoring” (into Mexico for US companies) has picked up recently due to China’s coal shortage (and resulting power supply issues).
Based on how important some Mexican ports are becoming (Laredo and others) and phenomenal growth in the activity of freight—both ways—between the US and Mexico, it’s becoming clear that the move from Asia has begun, though there has not been much talk in the media about this yet.
After all, China is facing debilitating power shortages, and there are many reasons to believe that this situation will continue. Additionally, with China being a host of the Winter Olympics, it appears that another interesting barrier to manufacturing will be thrown up in the coming months.
Reports suggest that China will want to put its best face forward for the Olympics, which probably means shutting down polluting factories and ensuring all available, already-scarce resources go into the event. Unfortunately, this means production will be reduced even more than it has been already.
A Big Question
So, should we keep working on optimizing our industrial real estate? It seems that the immediate answer is yes. However, as we move into newer and more expensive facilities to remain on the competitive edge, we need to solve other big challenges—namely in staffing. As another colleague noted during our most recent Think Tank discussion, we can talk about optimizing infrastructure all day, but “if nobody is loading or driving, this is never going to get corrected.” (That is, all the backups and breakages in the supply chain at large.)
I’ll talk more about some interesting approaches to staffing in a future article.