Third-Party Logistics warehouse operations will continue to thrive throughout this year as customers search for solutions to the supply chain service and costs issue, according to CBRE Group, the world’s largest commercial real estate services and investment firm.
This and other demands for warehouse property will push up rents. In 2021, 3PLs led Industrial & Logistics (I&L) warehouse and distribution center leasing activity in 2921, CBRE said, carving out a market share of 30%, compared with 13% that was obtained by ecommerce.
“3PLs will expand further in 2022 as companies look to reduce direct logistics costs and avoid the hassle of finding space in record tight markets with limited labor availability,” according to CBRE’s latest Supply Chain Advisory.
“As a result, 3PLs’ market share will increase in most U.S. markets as vacancy rates decline, rents increase and labor markets further tighten, leading to a projected leasing market share of 35% by year’s end.”
In addition to these rent pressures for 3PLs who don’t own their property, they will need to overcome the ongoing problem of labor shortages, which CBRE believes will lead to the greater use of automation and other technologies to lower providers’ reliance on human labor.
Of course, this has long been known by most 3PL warehouse operators, who also have been under considerable pressure to integrate into their operations advanced warehouse and transportation management systems to better serve customers.
CBRE said the overall industrial real estate (IRE) market set an all-time record for warehouse leases in 2021 and is expected to continue booming throughout the rest of this year.
Pressure will come from post-pandemic economic growth, continuing demand arising from ecommerce growth, and the widespread supply chain disruptions that have spurred companies to look for more space that will allow them to create and maintain adequate safety stocks.
Both private and 3PL warehouses and distribution centers are contained in the I&L category of IRE. leasing activity which in 2021 experienced more than one billion square feet of transactions,
Last year’s surging activity drove vacancy down to 3.2%, the lowest on record. With space incredibly tight, asking rental rates shot to $9.10, up 11% year-over-year and a new high, said CBRE, which began keeping track of these numbers in 1989.
“As retailers require more safety stock and ecommerce continues to expand, more space is needed. All signs point to the same demand continuing in 2022,” said John Morris, executive managing director and leader of the company’s Americas I&L business.
“Demand for industrial space remains at an all-time high,” he added. “Space remains historically tight, but we still have just enough product to keep pace with demand. Occupiers are in a highly competitive market and space for deals this size are becoming
few and far between, likely to result in growth markets becoming even more popular in 2022.”
On a net basis, the market registered positive absorption of 432 million square feet – an 81% increase from 2020 totals. Last year’s net absorption outpaced the previous record in 2016 by 50 million square feet Net absorption measures total leasing activity – that one billion square feet – measured against the space newly vacated during that period.
Battling Transport Costs
The top concern for occupiers in 2022 will be rising transportation costs and supply chain delays, CBRE believes. While the cost to ship goods via ocean freight increased more than 200% in 2021, the cost for domestic freight increased over 40%, according to data first reported by Drewry Supply Chain Advisors and the Cass Freight Index.
Although the increases may ease as 2022 unfolds, transportation costs are expected to remain elevated for the foreseeable future. Manufacturers are still not at full capacity and they are not seen fully recovering until 2023.
Over the course of this year, demand for goods is also is expected to rise, leading to increased competition and higher costs. Transportation costs make up 40%-70% of a company’s total logistics spend, while fixed facility costs, which include rent, make up only 3%-6%, CBRE observes.
“While rents will continue to rise significantly, it will pale in comparison to rising transportation costs,” the company said. “Therefore, companies will continue to lease more space to cut down on transportation costs.”
The construction pipeline boasted a record 513.9 million square feet of projects under construction at year end, 200 million square feet higher than this time last year, CBRE pointed out. However, construction completions were down 10.3% year-over-year as supply chain issues have hampered the construction timeline for many projects due to a scarcity of materials.
Morris notes that these increasing costs may shrink the overall number of scheduled completions, “We will need to see significant construction completions this year to accommodate all of this activity. Developers will likely take on more construction and materials costs to keep pace with demand, but space will remain very tight and rents will likely continue to rise at considerable rates.”
This pressure was most visible in the top 10 I&L markets, CBRE notes. Companies committed to 57 warehouse leases of one million square feet (MSF) or larger across the United States in 2021, a 19% increase from 2020. It charted the increase in mega warehouse leases as part of its analysis of the 100 largest U.S. I&L leases of 2021.
The industry sector claiming the largest share of those 100 leases is general retail and wholesale, which recorded 44 transactions (46.1 MSF). This was a significant jump from 2020 when that sector recorded 32 transactions (35 MSF).
Ecommerce-only occupiers – last year’s leader – were second at 21 deals (27 MSF), followed by food and beverage users at 15 deals (14.2 MSF).
Analyzing the geographic market landscape, CBRE says certain areas of the nation are under greater pressure than others. Looking at the numbers on a market basis, Chicago boasted the largest proportion of the top 100 transactions last year with 12 projects totaling 12 MSF. The Pennsylvania I-78/81 corridor followed with 11 projects but had the most transacted square feet at 12.4 million.
The Inland Empire had 10 large transactions involving 10.2 MSF, although fulfillment center construction is feeling pressure from environmental activists who are objecting to new projects. Some of them active on the Los Angeles side of that area already caused one large project to be cancelled.
Greenville–Spartanburg, SC, a fast-growing market in the Southeast, made the top 10 for the first time. “It’s notable to see Greenville-Spartanburg on this list for the first time,” said James Breeze, global head of I&L research for CBRE. “As core markets continue to struggle with availability, growth markets will begin to see larger deals as occupiers look to address their space needs.”