Demand for industrial space across the U.S. is booming. In fact, the vacancy rate in industrial buildings dropped to 5.3 percent in the first quarter of 2017 — the lowest rate in 17 years. The active market is evidence that a shift in consumer shopping patterns has taken hold, changing the nature of warehouse demand. Responding to healthy consumer spending and growing e-commerce sales, the combined logistics and third-party logistics (3PL) sectors signed 21.8 million square feet of leases in the first quarter of 2017. This represents 24 percent of total leasing activity in the warehouse and distribution market.
This trend has been taking shape over the past two years, when e-commerce logistics real estate emerged as the most active industrial sector in the United States, representing 30 percent of all “big-box” leases of 500,000 square feet or more through the first quarter of 2017. While traditional markets for distribution centers (Central Pennsylvania, Dallas-Fort Worth and the Inland Empire) remain very active, there is a growing shift to secondary Midwestern markets.
Indianapolis, Columbus, Cincinnati and St. Louis all saw a spike in e-commerce deals between 2014 and 2016. Each now ranks in the top 10 nationally. Indianapolis, in particular, has seen the e-commerce sector account for 61.2 percent of “big-box” activity during this time frame.
Why the Midwest?
Speedy delivery is critical to success in the ever-evolving e-commerce market. As such, it’s increasingly important to locate warehouses close to population centers to improve “last-mile” delivery.
Chicago is reaping the benefits of this strategy, while smaller Midwestern markets also offer certain advantages for e-commerce fulfillment centers, such as large, skilled workforces, centralized locations with connectivity to nearby fulfillment locations, and excellent quality of life for employees.
Tax incentives come into play, as well. Many Midwestern states and cities are trying to bring jobs back to their communities with a variety of economic development tools. The Southeast Cleveland submarket, for example, is home to a number of municipalities that offer property tax abatement and income tax credits. These pro-business tax policies, along with the area’s hundreds of acres of greenfields, make the submarket a logical choice for industrial developers.
If You Build it, Will They Come?
Despite rising rents, industrial tenants continue to seek quality space and are considering new construction to obtain properties that meet their needs. In St. Louis, warehouse rents increased 8.2 percent year-over-year in 2016, but that hasn’t diminished demand or slowed the pace of development. New construction topped six million square feet in 2016, the highest number on record. As of December 2016, developers were on track to deliver 2.5 million square feet of space in the year ahead, 90 percent of which is speculative warehouse space.
St. Louis isn’t the only Midwestern city seeing a spike in new development. Chicago had 22 million square feet of industrial space under construction at the end of 2016, more than any other U.S. market. Meanwhile, Indianapolis has nearly six million square feet of space is under construction while Kansas City has about 5.5 million square feet under development. As e-commerce companies continue to seek new warehouses to meet consumers’ ever-growing delivery needs, the lack of existing, quality “large-block” available space will continue to spur new development for the near future.
This post is the second in a two-part series on the growth of e-commerce distribution centers. The first post explores labor market implications of this expanding sector.
Matt Powers, Executive Vice President, leads and grows JLL’s emerging Retail/E-commerce Distribution practice group.