US warehousing demand shifting inland: JLL

Warehousing and distribution demand is surging across the US, most notably in inland markets fed by US ports, industrial developer Jones Lang LaSalle (JLL) said Tuesday. The surge of imports that led to higher inventories in the second quarter is fueling demand for logistics and distribution space in Chicago, Dallas-Fort Worth, Houston, Indianapolis, Phoenix, and in eastern and central Pennsylvania, JLL said.

Those were the markets with the highest year-to-date net rates of absorption for new logistics and distribution space, according to JLL’s second-quarter industrial outlook. Many of the same markets, with the addition of Atlanta and California’s Inland Empire, also had the highest rate of new construction in the first half of the year. And that construction rate isn’t flagging despite a slower moving economy, JLL said.

“While a growing pipeline and overbuilding may spark concern, the industrial market will benefit from the additional supply, especially as some markets see 1 percent vacancies,” JLL said. Port markets, including Savannah, California’s Inland Empire, Los Angeles, and New York-New Jersey, saw vacancies stay below 2 percent, pushing overflow demand and development to adjacent markets.

“Much of the heat around tenant movement is attributed to the influx of inventories being delivered following the supply chain crisis earlier this year, as well as companies expanding inventories to avoid future supply chain shortages,” JLL said.

Logistics and distribution projects led industrial leasing in the quarter, followed by third-party logistics. Together, they accounted for 28 percent of total demand.

New inland routes

The widespread demand and growth of inland distribution facilities reflects not just higher inventory levels but changing distribution patterns that are emerging in the COVID-19 era as importers and other shippers change the routes and lanes used to move goods to market. That activity is driving demand higher in locations that formerly were secondary markets but now are gaining importance.

Markets such as Austin, Texas, and Jacksonville, Florida, are growing quickly, fed in part by demand generated by the shift of containerized imports from Los Angeles and Long Beach to East and Gulf coast ports such as Houston and Savannah. In Houston, JLL said total vacancy dropped from 7.1 percent a year ago to 6.2 percent, while “3PLs and logistics and distribution have taken over as leading sectors.”

Nashville, Tennessee, close to Memphis, is one of the markets that is getting hotter. “Nashville has arguably emerged as a leading speculative industrial market in the Southeastern region,” JLL said. “The central location, relative affordability, and growing workforce are all attractive qualities for both investors and tenants alike.” Nashville’s vacancy rate is 3.2 percent.

Phoenix is benefiting from spillover demand off the West Coast, and high construction demand. “Rental growth has been in hyperdrive since the start of the pandemic, up roughly 14 percent from Q1 2020” in Arizona’s largest city, JLL said. “Despite consistent upward pressure from new deliveries, these gains have persisted well into 2022. Rents are poised to climb over the next several months.”

Ongoing expansion

Chicago, however, remains the lynchpin of inland distribution, despite intermodal rail congestion and delays and ongoing supply chain difficulties. “We expect Chicago to still witness strong logistics demand as O’Hare, Rockford, and Gary airports allow shippers to bypass crowded seaports and move product into the Midwest,” JLL said. The firm also reported more redevelopment projects in the broader Chicago area.

Some expansion has been delayed by shortages of building components, the industrial developer said. In Chicago, “heightened speculative development due to deliver by year-end could push into 2023 due to the shortage of critical building components such as roofing materials, electrical switchgear, and dock equipment,” said JLL. Chicago’s vacancy rate dropped to 2.9 percent in the second quarter.

Indianapolis, with a 3.2 percent vacancy rate, has a rate of absorption “typically reserved for large coastal markets,” JLL said, with 22 million square feet leased since July 2021. The data “illustrate[s] just how far Indianapolis has come as a major destination for industrial occupiers in a few short years,” it said, adding the market has 26 million square feet of space set for delivery in the next 12 months.

Atlanta is seeing so much construction that overbuilding is a concern, JLL said. Atlanta is hitting a historic volume of industrial space under construction, with more than 12 million square feet breaking ground each quarter this year, and a large percentage of deliveries pushed back due to labor and material constraints. “The market can accommodate and will benefit from this influx of supply,” JLL said.

With the nationwide average vacancy rate for warehousing and distribution facilities at 3.7 percent in the last quarter, and the average rent above $8 per square foot, JLL doesn’t see a slowdown in demand for industrial and distribution real estate, despite a slower-moving US economy. “Persistent demand in the market continues to enable construction activity and the pipeline to climb to new levels,” it said.