By Ward Richmond
For the first time since the early onset of the Covid pandemic, we are seeing a little bit of a slowdown in the Industrial real estate market.
eComm sales as a percentage of retail dipped for the first time ever in Q4 2021 (even though 2021 as a whole outperformed 2020)
Inflation is in full flux hitting a 40-year high.
The geopolitical climate is what I (who am admittedly not a geopolitics expert) would describe as “quite turbulent”.
Amazon is planning to slow things down announcing plans to sublease 10-30 Mil SF of warehouse space.
Leases are going out for signature and not coming back to Landlords. This unfortunately has happened to me personally on more than one occasion in the last couple of months.
All that being said, I am still very bullish on industrial real estate. So is Prologis – the world’s largest owner of my favorite product type as they recently attempted to buy Duke Realty at the premium price of $24 Bil but Duke is also bullish and they said “No thanks!” But then Prologis said “How about 26 Bil” and yesterday Duke said, “Well OK, let’s do this!” Congrats to both of these stellar companies on the biggest deal since Covid. And that’s saying a lot.
2021 was what I like to call, “a crazy year” in the US industrial real estate market shattering activity records. In my opinion, to keep up with that level of activity would have been unsustainable. It was a Black Swan event catalyzed by the aftermath of the Covid effect and a major spike in eComm caused by the government enforced quarantines, which forced everyone to start shopping from home.
I’ve read reports that US Industrial leasing volume is expected to taper down from 1 Bil in 2021 to 850 Mil SF still making 2022 the second strongest year ever.
So- technically, this could be considered a lull, but in reality, the market is still booming.
DFW industrial real estate performance in Q1 2022 was on the verge of legendary delivering 7.3 Mil SF of new supply bringing our total market size to 955.9 Mil SF. With a wopping 72 Mil SF under construction (granted our head of research Magic Mike Otillio believes that 15 Mil of that 72 still haven’t poured slabs yet), I expect we will break the 1 Bil SF threshold during 2023.
Furthermore, buildings are taking longer to build now than ever before due to shortage of building materials and labor which is leading to major delays as well as increased costs.
This may explain why we only saw 2.9 Mil SF of absorption in Q1 versus 10.7 Mil SF in Q1 2021. Let’s hope so because we are going to need to start seeing higher absorption numbers to justify DFW rents jumping from $4.11 psf in Q1 2021 to a whopping $5.96 psf in Q1 2022.
Ultimately, I think rents will continue to push as land becomes more scarce and construction more expensive. Cap rates have been hitting all time lows and I expect them to stay low for quite some time given potential for further rent growth – especially in a market like DFW which is still relatively cost effective when compared to other major North American shipping hubs like LA, NYC and Toronto where rents are moving into the $15-20 psf range – and in some cases, higher.
At the end of the day, we are running out of good land sites, eCommerce will likely continue to rise at a slow and steady pace. According to multiple supply chain gurus that I know, we will see a reshoring of manufacturing and a push to increase inventory levels. All of these things should keep the industrial real estate market rockin’ and rollin’.
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Absorption has gotten off to a slow start this year with only 2.9 million. This will pick up as the year goes on as several large tenants are set to move in within the few quarters.
Construction is at an all-time high with over 72 million square feet currently in development. This is the 19th quarter in a row of construction levels surpassing 25 million square feett.
The overall vacancy rate increased slightly this quarter as over 7.3 million square feet was added to the inventory.
Ward Richmond has over fifteen years of experience specializing in industrial real estate, and has negotiated over 500 transactions while working in over 100 cities across the USA, Canada, and Mexico. Several publications have featured Ward for his expertise in this field including the Wall Street Journal, Dallas Morning News, and Dallas Business Journal. He also serves on Colliers International Industrial Advisory Board, and is a member of the Logistics & Transportation Solutions Group.
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