Newmark’s U.S. Industrial Market: Conditions & Trends report discovered that in the past two years, one billion square feet of new industrial space has been delivered in the U.S., a tally that historically took four years to reach. With Newmark’s insights into rising vacancies and their findings about the impact of e-commerce spending, decline in home sales and demand for jobs, Lisa DeNight, contributor and Managing Director of Industrial Research at Newmark shares her thoughts about what this means for the industry, both short-term and long-term.
Read below to learn more:
What findings did you find to be the most surprising when completing your research?
What surprised me when doing the research for the report was the resiliency of the small bay industrial segment of the market, which is the bedrock of the entire US industrial inventory. The largest percentage of the inventory is small bay, which refers to industrial facilities under 100,000 square feet, specifically divisible into spaces as small as 10,000 or 15,000 square feet. The small bay space's resiliency was notable, including their low vacancy rate. Certainly, the supply side is the nuance here. Few developers are building small bay industrial; it’s not an economically feasible option for most builders. However, it was impressive to see both on the demand side and the supply side how resilient small bay was – and how that has been translating to greater capital markets interest.
"In the past two years, one billion square feet of new industrial space has delivered in the U.S., a tally that historically took four years to reach." What drivers have led to this new industrial space?
The drivers of this new space are a combination of ultra-low interest rates and ultra-high demand. Consumption was well subsidized during the pandemic - we collectively bought a lot of goods and the vacancy rates went down to all time lows as industrial occupiers scrambled for space to accommodate this surge in consumption and move goods to end-users ASAP. This speed-to-consumer dynamic is most supported by efficient, modern space. For the longest time, we didn’t have a robust development pipeline - our average inventory age is still about 42-46 years old. So, to meet that surge in demand for space, developers have responded in turn. The interest rates were very low and accommodating, and we reached a point where demand and interest rates aligned.
"Looking ahead, hundreds of thousands of jobs are needed in coming years to support manufacturing construction underway," of this point, how will we garner this amount of labor?
The big picture is that there is a large volume of jobs needed to fuel the manufacturing momentum that we have been tracking at Newmark. The labor component is hugely important; it is both a potential concern but is also a potential opportunity. A lot of public and private partnerships on a local and state level are invested in upskilling and workforce development. We have reported on the manufacturing projects in our Manufacturing Momentum: Scaling for Success in Key Markets report, which highlights the macro need to repatriate its supply chains, especially for critical industries. There is a gulf between what labor we have now and what we need – and solving it will take a variety of approaches on the local, state and national levels. And one trend we will be watching especially over the next 12 to 18 months is where legal immigration will go, and where we can expand legal immigration to the manufacturing labor pool.
"The industrial sector has the lowest share of potentially troubled loans maturing." Can you describe this impact in more detail?
The industrial market as a segment has a healthy vacancy rate, and good demand - we’re still accumulating positive net absorption. There will be some distress though when it comes to loan maturity as a lot of these properties were purchased or developed in an era of lower interest rates. However, loans that come due where there is a tenant in place, many have essentially deleveraged because of strong rent growth to such an extent that there’s no distress concern there. The rent growth that the industrial market has accumulated over the past few years – as well as steady demand - is the defining story here. For the longest time, logistics space was undervalued in relation to how critical it is to support our economy. That market rent growth has mitigated issues of distress in the industrial sector.
It's stated in the report that millennials are the leading generation of online shoppers. How does this impact e-commerce spending?
On the e-commerce front, millennials are the largest generation and have surpassed baby boomers. They have the highest propensity for online shopping as compared to their generational cohorts. The individual’s purchasing power is highest between ages 35 and 54. Millennials have demonstrated that they are going to continue having a leading edge in e-commerce spending because they are entering their highest spending power, not to mention there is the transfer of wealth from older generations. This data is important to warehouse and logistics space because any e-commerce sale is supported by more warehouse square footage than a brick-and-mortar sale. According to a Prologis metric, for every billion dollars in additional e-commerce spending there is an additional 1.25 million square feet of warehouse space needed to support that. This is only evolving further, and with the growth of social commerce such as TikTok, where users can purchase something they found on the platform. It’s also important to note that this growth equates to a stronger emphasis on delivery speed and choice, driving more warehouse space.
The report stated that home sales are at their “slowest in over a decade,” what does this mean for the industrial segment?
As the rise in consumer debt impacts spending habits, it is important to note that this impacts the drive of goods consumption, particularly in buying larger items like furniture which requires a lot of space in warehouses. The slower volume of home sales has depressed some segments of industrial occupiers. Now, they’re slower to expand because there isn’t as much demand for larger home goods.
Where are things heading in the industrial real estate industry? What trends can we expect to see in the coming months, based on these findings?
In the short term there will be a normalization in the market. In the long term we can expect to see a generational shift in manufacturing inventory expansion. We will continue to see a slow and steady return to market equilibrium over the next 12 to 16 months, as the supply pipeline dwindles and as demand normalizes and continues its upward march. We already expect to see higher absorption rates than we saw in the first quarter of this year. Long term, the global shift in manufacturing, in my mind, is the second greatest market disruptor in the U.S. of the 21st century, following e-commerce. Ecommerce really changed the entire equation for the industrial market. So will this. This true reinvigoration of the U.S. muscle memory of manufacturing is real and is going to be driving a lot of leasing and development for supplier ecosystems that are built out to support these production facilities. This will be playing out over the next few decades and will very much continue to be a bipartisan issue to repatriate supply chains.