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Warehouse demand grows rapidly as online commerce explodes

By Mike Wheatley | July 5, 2021

The ongoing COVID-19 pandemic has led to massive demand for warehouse space as e-commerce firms ramp up their operations in a bid to deliver their products to consumers faster.

That’s according to the latest Industrial Tenant Demand Study from commercial real estate services firm Jones Lang LaSalle IP, Inc., which forecast that demand for logistics facilities this year to store inventory, pack and ship online orders will be the highest on record.

JLL tracks demand for warehouses from a range of online retailers, including the likes of Walmart, Target, Big Lots, TJX and Costco. Those companies, it said, are increasingly competing with the world’s leading retailer, Amazon for warehouse space. Amazon, which does business entirely online, has been building and buying up warehouse facilities across the U.S. for years as it scales its operations. More recently though it has begun acquiring and leasing more warehouses in densely populated metro areas such as New York City in an effort to cut down on delivery times.

JLL Americas Industrial Division President Craig Meyer told CNBC that demand for warehouse space is being driven by a shift in consumer behavior from buying in stores to online.

The increased demand has resulted in some extremely hot markets where companies, including third-party fulfillment services firms such as FedEx and UPS, have faced intense competition for the often limited warehouse facilities that are available. One of the hottest markets now is Columbus, Ohio, which JLL has identified as a key strategic location because almost half of the U.S. population lies within a 24 hour drive. As such, industrial real estate demand there is expected to jump 61% this year, following a 13.7% rise in demand in 2020.

The area surrounding Savannah, Georgia, has been identified as another hot market, due to extensive backlogs that have built up at primary ports in Southern California. Retailers are looking for more ways to get their products shipped into the country, and Georgia’s ports, primarily Savannah, are opening up due to that. According to the Georgia Ports Authority, container volume at Savannah increased by 28% from 2016 to 2020. To cope with the extra volume GPA recently announced funding that will be used to expand capacity at the port, allowing it to unload additional containers.

The growth in shipping volume has led to unprecedented demand for warehouses in Savannah, with requirements growing by almost 10 million square feet in the past year, JLL’s report said.

Meyer said the shift towards more cargo going to the East Coast has been going on for a while, only to ramp up amid the COVID-19 pandemic. “There are a lot of companies looking to get there as a staging point now, as containers come off the boat,” he said.

Another sign of the hot warehouse market comes from a separate report by CBRE that was published last month. That report found that “taking rents”, which are the actual rents that landlords and tenants settle on, have been rising more quickly than asking rents over the past year. In other words, tenants are often agreeing to pay more than what the landlord is asking for. CBRE said this is due to increased competition for limited warehouse spaces available.

The CBRE report found that industrial taking rents rose 9.7% in the first five months of this year, compared to the same period one year ago. Over the same period, asking rents increased by 7.1%.

Meyer told CNBC that JLL has seen some “gigantic leases” in areas around New York City recently, including in the Brooklyn and Queens areas. “What’s remarkable about those is there are rents that are equal to office building rents,” he added. “Because being close to that cluster, for that last mile, is so critical.”

The reports were verified by Prologis, which is said to be the biggest owner and manager of logistics facilities in the U.S. in terms of total square footage it operates.

Prologis’ research group head Chris Caton said he has seen a growing disconnect between supply and demand, similar to what has been seen in the residential real estate market. He told CNBC that momentum in the market has been so strong that there is now a scarcity of available warehouse spaces in the U.S.

“Vacancy rates in the U.S. are four-and-a-half percent, basically 40-year lows,” Caton said. “There has never been less available to lease, at a time when customers really, really need it.”

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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