Tight market for industrial real estate impacts supply chain costs

The industrial real estate market is still recovering from the effects of the Great Recession of 2008-2009. The hangover from those years is now having a dramatic effect on the cost and availability of warehousing and distribution space in most key markets across the U.S.  Additional factors, such as positive demographic trends, expanding trade flows, inexpensive energy and increased manufacturing activity are also having a negative effect on availability for industrial real estate. 

The U.S. is one of the few industrialized countries experiencing positive population growth.  According to the United Nations Department of Economics and Social Affairs, between now and 2050, the U.S. population will increase from 320 million to over 400 million people. On the positive side, these 80 million new consumers will provide not only an expanded market for goods and services, but at the same time require additional supply chain infrastructure to serve their needs. 

In addition to our population expansion, according to U.S. Census Bureau data there is also a shift in the U.S. population to concentrate in the south and east. This shift, coupled with ever-increasing urbanization, is putting additional strain on infrastructure in the affected markets.

U.S. ports continue to move more freight than ever. In spite of the West Coast labor issues this past spring, overall port volumes may end the year up by as much as 6% over 2014, according to estimates from Piers. This increased freight volume is a contributing factor for the L.A. industrial real estate market's current vacancy rate of less than 2%. 

The U.S. has some of the least-expensive energy in the world. According to a Canadian Government study, the price of natural gas in North America is currently one-third of the price in Europe, and one-quarter of the price in Japan. This inexpensive energy has led to an unprecedented expansion of the plastics industry in Texas and other energy-producing regions.  It is estimated that over 100,000 new jobs were added in Houston in 2014. 

The effects of inexpensive energy, a relatively stable regulatory environment and skilled workforce has led many manufacturers to expand production in the U.S. or to “re-shore” production from other countries. For many goods, the total landed cost of production is now lower in the U.S. than China. Total landed cost takes into account not only the actual cost to make the product, but also the logistics costs to get the product to the end user. According to statistics published by the U.S. Bureau of Labor Statistics and the Federal Reserve, U.S. manufacturing output has increased by over 50% the past 25 years.

Finally, the post-recession period has seen a lack of new construction. According to data published by CBRE Econometric Advisors, new industrial real estate completions dropped from over 200 million square feet nationwide in 2008, to less than 40 million square feet in 2010.  CBRE is predicting that new construction will not meet demand until at least 2017.  

The foregoing factors have led to historic lows in industrial real estate availability in the U.S. – together with significant increases in rental rates. Overall vacancy rates nationwide are currently less than 6%, with net absorption (additional space being used) increasing to as much as 220 million square feet in 2015 – from a low of negative -126 million square feet in 2009, according to estimates from Jones Lang LaSalle. This reduction in availability has led to an estimated 18% increase in leasing rates since 2012, with rates expected to increase an additional 15% by 2018. 

When setting their supply chain budgets in future years, companies must take into account not only the increased cost of industrial real estate, but also longer lead times for new space in many markets.   

 

Rob Kriewaldt
Director of Client Solutions

WSI

920.831.3700

WSISales@wsinc.com

Twitter @WSI_Logistics