In spite of growing evidence that the United States is spiraling down deeper into a recession, the demand for warehouse space is expected to cool a bit but remain healthy, according to the global industrial real estate giant CBRE.
“The U.S. industrial market is continuing to see robust demand, and companies are adding warehouse and distribution space to protect their inventories, diversify their supply chains and process growing ecommerce sales,” observes John Morris, CBRE President of Industrial & Logistics in the Americas.
“Even with a more challenging economic backdrop, we’re still seeing that companies are interested in expanding their footprints in the short-term.”
CBRE’s Industrial Occupier Survey found that 64% overall and 81% of third-party logistics companies responding plan to expand their real estate footprint over the course of the next three years, in spite of economic uncertainty.
Of these companies, 47% say that they are planning to expand by more than 10%, while 29% say they plan no change, but only 7% expect to downsize.
When it comes to building more space 3PLs are in the lead with 81% planning to expand their footprint over the next three years, while 75% of both Food & Beverage, and Building Materials & Construction companies will do the same also intend to expand their real estate footprints despite supply chain disruptions, labor shortages and high occupancy costs.
On the other hand, most manufacturers say they are not planning change in their footprint, with only 25% expecting to expand.
3PLs also play an important role in warehouse and distribution center space expansion plans: 66% intend to lease on open market (second-hand facilities), while 44% say they will partner with a developer to lease build-to-suit facilities.
At the same time, 37% reported that they intend to purchase land and self-develop their own facilities. However, 31% are planning to meet their future space needs by operating in customer-owned facilities — meaning 3PL warehouses.
Location, Location, Location
When it comes to preferred locations, more than a third of respondents told CBRE they plan to expand in the Southeast over the next 12 to 24 months.
This region boasts several large logistics hubs serving growing population centers, large affordable labor forces and seaport connectivity. This region also benefits from a supportive business climate for manufacturers, CBRE points out
Growing industrial markets like Atlanta, Nashville, Orlando, Charleston and Charlotte are attracting occupiers in need of additional warehousing or manufacturing facilities.
Other regions that ranked high for expansion include the Southwest and Midwest, where markets like Reno, Phoenix and Minneapolis have become optimal locations for occupiers due to their strong demographics and infrastructure, which supports industrial demand.
Within regions, occupiers are looking at different characteristics. When it comes to the top decisive factors for building selection, nearly three-fourths (74%) of respondents cited occupancy cost (rent) as the top factor when selecting a building within a market, followed by lease options (50%), transportation (47%) and building design (45%).
Other important factors considered during site selection, although weighted less heavily, include quality of local infrastructure, developer or owner reputation and sustainability rating.
Regarding essential building features, distributors and ecommerce occupiers have returned to a “bread and butter” mentality, according to CBRE When selecting a new warehouse, 81% of occupiers identified clear height as one of the most important building features.
Other features sought out most often include the total number of loading bays/dock doors (76%) power supply (81%), column spacing (76%), and the capacity for expansion (76%).
Power supply is also top of mind given heavy use of electricity from manufacturers and warehouse operators; and this also is expected to continue driving site selection, CBRE says.
“Major distributors and ecommerce occupiers require highly functional properties to process high volumes and need modern buildings containing such features,” CBRE says. This is a primary factor fueling the record 662 million square feet of new development underway in the United States.
“The average age of a U.S. warehouse building is 43 years, and 28% are more than 50 years old,” the company points out. “Given the continued growth of ecommerce and retailer omnichannel offerings, warehouses approaching obsolescence in these markets will present opportunities for redevelopment, particularly in infill locations that support last-mile delivery.”
Supply Chain Challenges
When it comes to the major supply chain challenges facing IRE occupiers, 61% of respondents report that labor availability is a major impediment for the growth of their business, while 58% say they are most concerned about rising rents.
In regard to the labor shortage 78% of responses pointed to improving wages and conditions and 49% to improving training programs as solutions.
“The fact that occupiers are improving conditions for workers and looking to increase automation means they are expecting leaner operations with more skilled labor,” CBRE observed.
Seen as less important strategies for employee recruitment and retention of employees included wellness programs and promoting the company’s sustainability credentials.
In addition, 48% point to the challenges they face from higher transportation costs. “Occupancy costs accounts for just 3 to 6% of total logistics spend, whereas transportation costs account for about half or as high as 70% of total spend,” CBRE explains. “However, rents are rising rapidly, so occupiers clearly have sticker shock.”
Other concerns include the lack of suitable warehouse/manufacturing space and inflexible lease options Top industries represented in these responses include 3PLs, electronics and appliances, building materials and construction, and food and beverage manufacturers.
To address ESG considerations, occupiers are planning to meet their net zero carbon targets via their real estate footprint by switching to LED lighting, using alternative energies on-site and using electric material-handling equipment. Fewer responses included adding electric charging points for delivery fleets and capturing rainwater.
In regard to sustainability, three-fourths (75%) of occupiers told CBRE that they would be willing to pay higher rents to switch to green energy. The majority would pay more if the savings on future operational costs would be matched. Still, more than a quarter said they would not be willing to pay a premium to switch to green.