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Retail Drives Demand for Big Box Warehouses

Volume 2, Issue 4
February 28th, 2014
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Demand for industrial distribution centers that are larger than 300,000 square feet (known as “big box” space) is high and rising, according to Jones Lang LaSalle’s first Big Box Velocity Index released late last year.

vol-2-issue-4-last-article-copy-e1401906936516The Chicago-based international real estate firm observed, “Improving economic conditions, the continuing growth of ecommerce and a deep bench of tenants seeking space have all created this highly competitive fight for industrial and warehousing space.”

As a result, there is 96.7 million square feet of industrial construction underway – nearly half of it speculative – with an average building size of 360,000 square feet.

JLL cites five key trends that are shaping the 2013 big box industrial market – and creating markets that will be winners and losers. Topping the list of industries fueling demand are retail, especially ecommerce retail players, along with the logistics and distribution, and manufacturing sectors.

The company said that retail (defined as traditional retailers through consumer non-durables) accounts for more than one third of total demand with most concentrated in the Northeast – particularly in New Jersey and Philadelphia area.

Ecommerce Sales Expected to Double

“With ecommerce sales expected to more than double over the next four years, we anticipate increasing demand for highly specialized facilities,” declared Craig Meyer, President of Industrial for Jones Lang LaSalle.

“We are seeing a number of major retailers in the market looking for mega-fulfilment centers more than two million square feet near large population centers – especially in the major logistics markets in Pennsylvania or New Jersey, Atlanta, Chicago and of course, the Inland Empire.”

A resurgence in activity from distribution space users has manifested in rising demand in two primary categories: the 250,000 to 499,999-square-foot range, and in facilities of more than one million

square feet. Together these two categories comprise more than half of the requirements from tenants in the marketplace, JLL reported.

There have been 14 consecutive quarters of positive net absorption, which has gone a long way towards bringing vacancy rates down, the Chicago-based company noted.

Construction activity began to increase during the first half of 2012 and much of this stemmed from committals prior to groundbreakings. According to JLL, even more speculative development is currently underway.

Traditional distribution corridors are showing strong market conditions, however the Northeast is seeing the majority of activity. JLL said that five of the top six industries with space needs are looking in this region with many in the market for spaces in excess of one million square feet.

In the Midwest, however, tenant requirements (on a square footage basis) are down by 26% owing to robust leasing activity in quarters past.

“The Northeast is home to 55 million people, and this is appealing to retail distributors that want access to a lucrative market that a mega population offers: an expansive consumer base and an existing, intricate logistics infrastructure,” said Aaron Ahlburn, JLL Americas Director of Research for Industrial and Retail.

“Larger blocks of functional space are also more readily available here than in the neighboring Midwest, meaning tenants in New Jersey have more choice as opposed to facing competition for fewer large space options in Chicago,” he added

“It’s no surprise that the retail sector comprises more than a third of our growth,” Ahlburn pointed out.

“The demand from ecommerce is shaping the market more than ever before, and is influencing the requirements of both users and the institutional investors who make speculative construction possible.”

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