Data issued today by Chicago-based industrial real estate firm JLL highlighted very strong fundamentals for the U.S.-based industrial real estate market, for the first quarter.
In its “U.S. Industrial Outlook: Q1 2022,” JLL observed various takeaways reflecting how competitive market conditions continue to give landlords what JLL Senior Director Mehtab Randhawa called the edge in the market, while also placing upward pressure on asking rents.
Key takeaways cited by JLL in the report included:
- the national vacancy rate, despite an influx of new deliveries, heading down, for the sixth consecutive quarter, from 3.8% to 3.4%;
- the average asking rent increased to $7.62 per square-foot (p.s.f.), up 7% compared to the fourth quarter, marking the largest quarter-over-quarter increase going back to at least 2000;
- year-to-date net absorption—at 110,758,069 marked the third-highest quarter for net absorption on record and the highest of any first quarter, following the fourth quarter’s 141.8 million s.f. tally;
- year-to-date construction deliveries came in at 89,992,432, with properties under construction at 530,474,986, with a quarter of the latter tally in the “mega box” size category of 1 million s.f. or larger;
- developers delivered 90 million s.f. of new inventory in the first quarter, in line with the fourth quarter of 2022;
- port markets maintained a pricing premium over non-port markets as rent growth reached a 23% year-over-year gain; and
- overall first quarter transaction volume—at $33.2 billion—reached its second-highest total ever for the first quarter
“Occupiers’ sticker shock is not limited to asking rents, though,” wrote Randhawa in the report. “Those looking to sign new leases in the lowest-vacancy markets are facing steeper annual rent escalations and minimal concessions. Companies with a business imperative to locate in these white-hot markets are willing to pay the price, while more location-flexible occupiers are exploring their options in markets with cheaper rents, lower labor costs and more abundant new product. This trend is fueling a shift of demand to markets in the Southeast and South Central regions.”
Tenant shares: JLL observed that 3PLs paced first quarter leasing activity (as a percentage of total leased square-feet), at 14%, with logistics & distribution next, at 12%. Rounding out the top six were: construction materials & building fixtures, at 12%; food & beverage, at 10%; retailer (traditional), at 8%; and e-commerce, at 8%. And it added that overall leasing volume saw a 17% annual increase.
As for what it called key growth industries, JLL pointed to 3PLs leading the way, with a 60% annual gain, for annual growth in leased square-feet, followed by construction materials & building fixtures, at 32%; and food & beverage, at 23%. And, looking at traditional retailers, JLL said that while they saw a lull in leasing, at the onset of the pandemic, JLL Research noted that leasing activity in the sector has risen 38.4% over the last three years. It said that strong demand from home improvement retailers, like Home Depot and Lowe’s, was a key factor in this sector topping e-commerce in the first quarter.
The JLL Industrial Research Team said that 3PLs signed leases for nearly 60% more space than they did in Q1 2021, bolstered by continued outsourcing of supply chain operations from e-commerce retailers and others.
Region-by-region: Looking at under construction square-feet as a percentage of current inventory by region, JLL said that South Central led the way, at 6.4%, followed by Mid Atlantic, at 4.9%, Northeast, at 3.8%, Southeast, at 3.7%, West, at 3.6%, and Midwest & Great Lakes, at 2.8%, with the average U.S. total coming in at 3.8%.
When asked what drove the 7% quarter-to-quarter increase, for average asking rent, at $7.62 p.s.f., the JLL Industrial Research Team explained that over the first quarter vacancies continued to fall and pent-up demand from the pandemic kept leasing volumes elevated.
“The strong fundamentals and competitive environment observed this quarter placed upward pressure on asking rents,” they said. “Additionally, average asking rents on new buildings delivered to the market have pushed overall asking rents to new highs.”
With JLL’s Randhawa noting that more location-flexible occupiers are exploring their options in markets with cheaper rents, lower labor costs and more abundant new product, the team said that this is a byproduct of tenants that have flexibility migrating to low-cost markets with labor availability.
“For example, we are seeing tenants move from New York and New Jersey markets to the Southeast,” the team said. “In contrast, tenants with operations that are closely tied to the ports are staying as it makes sense financially and due to rising drayage costs. We’ve seen this happening with Los Angeles and Long beach tenants, who are migrating to Phoenix, Reno, Central Valley South.”
The JLL Industrial Research Team said that high leasing volumes observed in 2021 continue to push net absorption in 2022, as tenants took physical occupancy of their space. They added that historically first quarter absorption totals have been lower than other quarters due to cold weather conditions, which play a role in move-in delays.
What is next?: Looking ahead, JLL issued a bullish outlook for the industrial real estate market going forward.
“Despite some expected pullback on pricing for larger deals ($150M+), due to the prevalence of financing, transaction volume is expected to remain robust through the year,” the JLL Industrial Research Team said. “With higher interest rates putting downward pressure on pricing, cash-focused buyers are likely to be active and competitive on transactions, so deal velocity will be upheld throughout the remainder of 2022.”