Logistics properties remain in demand, albeit after an easing in over the last two quarters. But are the logistics real estate market dynamics changing underfoot?
Coming out of COVID, logistics properties, whether they be warehouses, DCs, terminal space or just about anything related to the movement of freight, were in heavy demand. How heavy? Warehouses were literally overflowing with freight and even parking lots became ad hoc “terminals”. There just wasn’t enough vacant space to store, process, and effect transport for the surge of freight. Another factor underpinning this demand for space was the rapid rise in e-freight that has moved into urban areas squeezing space big and small.
And it wasn’t just the logistics niche that felt the pinch, virtually all “industrial properties” were under siege. As Colliers, a global real estate company, wrote in their 2023 4th quarter report, “Following two years of white-hot demand for industrial space, supply and demand fell out of balance during 2023.”
A New Year Same Problems
The higher “vacancy rates” for industrial properties, particularly in the logistics market niche, is something of a glass half empty/half full conundrum.
Ti (Transport Intelligence), a provider of supply chain market intelligence, in their “Warehouse Tracker Q1 2024” reported, “Vacancy has continued to rise across all three major regions [Europe, North America and Northeast Asia], although vacancy growth has been slowing in light of a contracting construction pipeline and less completions. Vacancy remains significantly higher than Q1 2022 due to an influx of new supply and moderating demand.”
But Ti added an important caveat to the analysis commenting, “It should be noted that vacancy rates remain at historic lows, although much more so in Europe and North America rather than in Northeast Asia.”
And Ti isn’t alone in its assessment of the industrial real-estate market. In a Jones Lang LaSalle, Inc (JLL) research report issued in May 2024, the global real estate company noted, “On the industrial side, first quarter leasing activity declined globally as decision-making slowed amid geopolitical and economic uncertainty. In the US, occupiers continue to manage through the record amount of space that was leased following that pandemic. Across much of Europe and Asia a limited supply of modern energy efficient space is constraining activity. While growth in average rental rates moderated across all three regions, long term fundamentals in the industrial sector remains strong, supported by nearshoring requirements and demand for high quality, sustainable space that will allow US technology integration and automation.”
And a shift in warehouse leasing appeared in 2023 and is still underway. CBRE, a global real estate company in an April commentary reported “general retailers and wholesalers leased the most big-box warehouse space in North America in ’23, accounting for 36% of all transactions according to a new report from CBRE. “Retailers and wholesalers dethroned last year’s top occupier category 3rd party logistics (3PL) providers.”
The report also added, “Automobile, tires & parts and building materials & construction also saw an increase in share of leasing activity which overall fell 15.8% in 2023.
What Does the Future Hold?
There is little doubt that the COVID-19 pandemic changed the business landscape and everything since has been an adjustment — whether that is how and where we work or the view of the supply chain. And logistics real estate is no different. So, what does the future of logistics space look like?
When Kardex Remstar, an automated storage systems provider, published the “2024 Warehousing Industry Report” [with Peerless Research Group] that surveyed 200 warehouse and distribution center professionals. Their findings noted, “The persistent labor shortage, ongoing supply chain interruptions, rising freight costs and the fear of running out of physical space remain as top issues in the order fulfillment and distribution operations space.”
And as with all things concerning the supply chain, nothing happens in a vacuum — especially the demand for storage space.
Link Logistics, a leading owner of last-mile logistics real estate, recently published a novel take on a new market pressure that will, as Link Logistics says, have a “spillover impact” impact on logistics space in the US market.
Link Logistics’ Research & Analytics department believes that the transition “clean energy transition” will prompt the demand for 84 million sq/ft. Although in recent months there has been considerable pushback on aspects of the adoption of clean energy systems, nonetheless the transition is underway.
And the logic behind the Link thesis is understandable: “Let’s say a company that makes EVs moves production to a new market. Next, the company must establish an “ecosystem” of support companies and suppliers, sparking the need for more warehouse space.” Not coincidentally, much of this transitional activity is located in already high density logistics corridors putting pressure on existing space. Even accounting for market shifts associated with nearshoring on onshoring moves Link Logistics forecasts, “that manufacturing and associated supplier networks will ultimately drive demand for approximately 408 million square feet of space, comprised of 324 million square feet of industrial real estate for direct manufacturing and 84 million square feet designated as spillover space for supplier networks.”
How much impact this will have on industrial properties, and specifically logistics properties, over the next decade might turn out to be a game-changer. Could we see another run on space like we did in the post-COVID surge?
However, Colliers sees the market a little differently, forecasting a normalcy of sorts in the near term, “As construction completions and demand fall more in line towards the end of 2024, vacancy is expected to plateau around 6.6% slightly above the 15 year average of 6.4% before it begins to fall again in 2025.”
Nevertheless, it is hard to shake the not too distant memory of every available inch of space crammed with freight without wondering if this is just a lull before another storm of demand for logistics space.
