The global COVID-19 pandemic thrust industrial real estate into the spotlight as more people shopped from home, creating a seemingly insatiable demand for warehouse and logistics space to store and move the goods they ordered.
As a result, rent for industrial properties increased 6.3% in 2022 to $7.03 per square foot, and the market set a record for 450 million square feet of new space delivered, according to Commercial Edge’s January industrial report.
While the demand for industrial space is strong, rising rents have many tenants looking at locations that aren’t in the most desirable areas to contain costs, real estate attorney Steve Lurie, a partner with Los Angeles-based Greenburg Glusker, told Benzinga.
“These locations that are not quite as desirable and a little farther away from preferred sites are attracting tenants because of their rate structure, and sometimes the land is cheaper, so there can be some amenities you can’t offer when the site is closer in and less plentiful,” Lurie said.
Even though industrial development is being pushed to the outskirts of many cities, key elements such as access and utilities are still critical.
“Access to interstate highways and utilities nearby is important in terms of evaluating a site that’s more remote,” Lurie said. “Rail is still an advantage.”
After severe disruptions to the supply chain during the pandemic, many manufacturers decided to bring production back to the United States and reduce their reliance on imported goods. Although record levels of industrial space were delivered last year, development still couldn’t keep up with demand, and the average vacancy rate for the top 30 markets decreased to 3.9%, according to the Commercial Edge report.
Rising Development Costs
Labor shortages and increased construction material costs are other factors that are impacting the cost of developing industrial products. Steel, concrete and roofing materials usually account for up to 80% of shell costs, according to the Emerging Trends in Real Estate report published by the Urban Land Institute and PwC. Surging prices for these materials have resulted in a 50% increase in finished construction costs since 2019.
Labor shortages and high construction costs could be contributing to developers looking for cheaper land further afield where they can compete for tenants at lower price points.
“The best locations are still the best locations, but in supply-constrained areas, they’re hard to find. There are tenants looking for things less expensive, and they’re willing to be a little inconvenienced,” Laurie said.