Industrial market outlook

Industrial Market Outlook for the Eastern US

A powerhouse panel of industrial experts took to the stage at NAIOP’s I.CON East to discuss the state of East Coast industrial markets, what challenges are ahead, how macroeconomic factors could impact the sector, and what opportunities are on the horizon.

Moderated by Stephanie Rodriguez, national director, industrial services, Colliers, the panel included Kate Nolan Bryden, LEED AP BD+C, senior vice president, MRP Industrial LLC; Emily Cannon, chief investment officer, Dogwood Industrial Properties; Brandi Hanback, executive vice president, co-head of development and head of FTZ, trade & logistics, Rockefeller Group; and Sonya Huffman, chief administrative officer, Link Logistics Real Estate.

Huffman began by talking about a unique team of leasing and investment experts at Link who help inform the company’s development perspective. “Reports from our market teams have really advised our overall strategy as we think about development in the future,” she said. The company is examining supply and demand ratios three to five years ahead, she said, considering construction starts that have dropped off for everyone. “We are actively seeking both build-to-suit opportunities and acquisitions, looking primarily at gateway markets where large companies want to be located.”

Bryden said that MRP Industrial delivered around 6 million square feet in the last year and is actively working on leasing that space despite somewhat slowing demand. “We’re still bullish on the markets where we’re active, including Northern New Jersey through Central Virginia,” she said, noting that the company is looking at new markets that are a great fit for their capital partners.

Rodriguez probed what is driving the curiosity for new markets, and Bryden replied, “resilient markets that are likely secondary markets we’ve been hearing about and that our capital markets have expressed interest in, and that are largely East Coast and accessible from our homebase.”

Hanback said new investors are emerging in gateway markets. “Things bottomed out last year, and I see investors moving this year to try to get ahead of the increasing momentum to get the best deals,” she said.

The real estate adage of “location, location, location” is still a force in tenant demand although other factors are driving occupiers’ decisions on where to locate. “Labor, transportation incentives and utilities are all part of the equation,” said Hanback.

“We’re hearing that imports are up over last year significantly, and that’s a leading indicator of a rebound,” she said. She noted that operators want more space in more modern facilities, but the C-suite is slower to make that investment.

The need for electrical power capacity has jumped over the last five years, and getting the initial load approved for a building can be difficult. “Our tenants are aware of the sensitivity of utility companies and distributing that power for spec development,” Bryden said. MRP recently upgraded a spec building that delivered at the end of last year, doubling the building’s power capacity to make it more attractive to potential tenants. “This is definitely a conversation for larger users, not something you’d see as much in spaces under 250,000 square feet.”

Clients that don’t fully understand their own diversified load and power requirements during the RFP phase can be challenging. “Sometimes clients don’t really know,” said Huffman. “They’re dealing with a lot of changes in their own utilization,” noting that they may be planning for intense power loads upwards of 6,000 amps, but don’t have that demand initially and power companies are reticent to make it available right away.

“Some tenants require higher power needs as part of their growth strategy,” said Bryden. “They anticipate more automated approach in their warehouse, but that makes it hard for us to plan for a 10-year term.” She said that tenants are thinking ahead about future electrified vehicle fleets or how pending regulations will change requirements.

Beyond electricity, securing switch gears and other equipment can be delayed for up to 15 months.

Types of space users remain largely e-commerce, third party logistics (3PL), and food and beverage suppliers, although it varies by market. Hanback said industrial supply companies are active, including HVAC and service providers, as well as pharmaceuticals and health care. “A lot of inventory is coming into the U.S. right now, and we’re seeing a lot of activity,” said Huffman. “They still want to be close to their customer, which smaller spaces can help achieve. It’s what drives and maintains occupancy.”

Leasing kicked into high gear during 2021-2022 and slowed down last year. “Demand is returning,” said Hanback. “Yet there’s constraint in capital investment and lack of agreement between operations and the C-suite. The process is very slow. When we see some of the capital markets normalize, we’ll see some of those decisions get unlocked and start to see transactions.”

“So much product flooded the market in the last year it’s going to take time to absorb it,” said Rodriguez. “Tenants are staying where they are right now because their cost of capital is the same as the developers and investors in the room looking at their cost of capital to build. Our data shows we should reach equilibrium by end of this year.”

E-commerce giants Amazon, Walmart and Target are retooling their delivery strategies to meet customer expectations after strategies somewhat failed to meet expectations during the busy holiday season. A flurry of activity in big-box leasing has emerged on the West Coast and could move East. “That’s another reason to be optimistic for industrial,” Bryden said. “A lot of companies look to Amazon on customer service, returns handling and overall efficiencies,” and will follow suit.

The capital markets and inflation have impacted both development and leasing. Cannon said that what the capital markets truly need is stability so that it can appropriately price the product. “We also need to become realistic about our new normal. Is it a new-old normal? Is it the old normal? Until we figure out what will happen with rent growth, it’s going to be difficult to find stability.”

“Investors are being very discerning,” she said, noting that “one comp does not a market make,” given that a slower market makes fewer comps available. “There are not enough transactions to create momentum right now,” she said.

Huffman added that pulling together many comps can help identify a pattern and that, “foundationally, it comes down to buying good real estate in really good locations.”

“We have to go back to the math and what we understand about a market historically,” said Cannon. She said that some markets have a “natural normal” of a slightly elevated vacancy and a lot depends on how the landlord treats it.

“The focus on credit is back, and attention to a stable cash flow over a period of time,” said Hanback. “There’s quite a bit of activity in midsize deals for buyers. Institutional activity is expanding, but the deal sizes aren’t as big as they might have been.”

Cannon said there’s a “tidal wave of capital” still in the market, and that’s creating a lot of buoyancy.

In closing, the panelists agreed that they’re very optimistic about the next three-to-five years. Greater headwinds of antidevelopment sentiment and aging inventory (40% of warehouse stock is considered obsolete, and roughly 25% of that is more than 50 years old) could create challenges, but all agreed that the tailwinds propelling growth are stronger and the East Coast industrial markets will remain solid.

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