Industrial Market Competition Continues to Accelerate
The continued strength of the industrial market is driven by more than just the “Amazon Effect.” The overall growth of ecommerce is fueling demand, which is creating competition for space and requiring tenants to make faster decisions.
E-commerce companies have experienced double-digit sales growth, resulting in the need for more warehouses to satisfy the logistics requirements for fulfill online order deliveries. These e-commerce deliveries tripled between 2013 and 2018, prompting companies to seek more urban infill warehouse locations so they can provide faster deliveries to consumers. However, this factor has a multiplying effect on the demand for industrial space – as the growth of e-commerce sales have grown so has the rate of product returns. Online customers are three times more likely to return products they buy online versus those they bought at a retail store. And, e-commerce companies need 20 percent more space to manage reverse logistics compared to normal sales.
NAIOP, based on JLL research, recently identified several macroeconomic factors such as tenant needs, last-mile delivery, and rapid technology evolution that will impact the industry in coming years. What follows is a discussion of these concepts and how participants in the industrial market can be better equipped to deal with the greater competition that is resulting.
Tenant Needs are Evolving
Demand for in-house logistics and distribution space is growing. Of the total U.S. demand for industrial space, more than one-third, 36.3%, of demand is coming from logistics and distribution, e-commerce distribution and third-party logistics companies (3PLs). The profile of the space is changing though.
More tenants are on the move and require more locations. Currently 1,600 tenants are in the market, looking for approximately 600 million square feet of space. This includes both new-to-market occupiers, but also those looking to expand or replace square footage – whether that means a last-mile e-commerce delivery center close to consumers or a more modern, flat-floor big-box warehouse that is ready for today’s high-tech distribution.
Less is more when it comes to square footage for those last-mile locations. As consumers begin to take next-day or even same-day delivery for granted, distribution strategies increasingly include smaller delivery centers, some of them in urban infill locations, that help companies cover the last mile to the customer.
Large Spaces are still driving the market
While many tenants are looking to fill the gaps in their distribution networks, particularly for last-mile space, over 45% of tenant requirements are for spaces in the 100,000- to 250,000-square-foot range. Even as companies seek out smaller warehouse and distribution spaces, the megabox still has a role to play. At least 17 markets have tenants seeking facilities sized 1 million square feet and up.
Competition for space shows no signs of slowing
In every U.S region, tenant demand exceeds space availability. On average, currently only 48.9% of tenant requirements can be met by the amount of space on the market today. With the competition for space continuing to grow, it is not surprising that the pace of deal making is accelerating.
A year ago, the average space search took 13 months to complete. Now, search time is down to seven months. This is increasing pressure on tenants to make decisions faster, brokers to be more efficient in finding the right space for their clients and owners to deliver space faster. Tenants are flocking to new spaces. Relocations grew by 108%, year-over-year, as tenants sought high-quality spaces that enables incorporation new technologies in prime locations.
However, Deloitte’s industry model shows demand growth tapering as the availability rate will likely rise due to an additional 510 million square feet of new industrial real estate space expected to enter the market, which outpaces the 421 million square feet of expected additional demand. This could obviously shift the competition from the tenants to the owners, but competition will remain and pressure will remain on all involved parties.
Ways to Mitigate the Competitiveness
Whether you are a tenant looking for space in a tight market, an owner looking to lease space, a developer seeking to presell a new development or a broker trying to facilitate a transaction, technology can give you a competitive advantage. Beyond online listings or online deal rooms, Virtual Reality (VR) can provide that competitive advantage that allows you or your client to get a deal done without sacrificing process.
Whether you are looking to build a new megabox facility, an industrial campus on currently vacant land or convert an existing building into new industrial spaces, VR is a way to quickly, efficiently and effectively engage buyers and tenants. The result is compressed transaction cycles for both sides without adding risk. For owners it can reduce holding and overhead costs, accelerate pre-leasing and enhance their marketing by providing access to anyone, anywhere, on any device at a cost that is similar and possibly less than some traditional marketing.
QuickTour by Pix is a great example of this capability. It is an extremely affordable solution which converts 2-D floor plans or site plans into a virtual environment. These CAD-accurate models are typically delivered in two to three days. QuickTour models are ideal for representing properties and spaces when time and cost are meaningful constraints.
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