Building an Industrial Warehouse

In 2021, the US had over 503 million-square-feet of space dedicated to industrial warehouses, with demand outpacing supply. Nationally, only 4% of warehouse space stood empty—a drop of 110 basis points YOY.

Demand for warehouse space hasn’t shown any signs of slowing. If anything, thanks to increased demand for home delivery and exploding ecommerce operations, it’s increased. There isn’t one sector that uses warehouse space where demand has fallen. 

Over the past 10 years, industrial real estate has outperformed other CRE investments. A report by the National Association of Real Estate Investment Trusts (NAREIT) found industrial real estate investment trusts (REITs) have outperformed every other REIT sector YOY for the past five years. 

According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the industrial sector has more than doubled the annual total return of the next closest CRE sector, generating an annual total return of more than 32% in 2021.

Another forecast suggests that both warehouses and fulfilment centers nationwide will remain short on space through the end of 2023. We’ll continue to see low vacancy rates and soaring rents. Rent has increased 7% quarter-over-quarter even as vacancy rates have hit a record low 3.9%. The average asking foot per square foot increasing from $6.31 to $6.76 per square foot in Q3 2021.

Importers, in particular, are also seeing higher costs. Baseline imports are 20% higher than in pre-pandemic 2019, including a 22.4% increase in NY and NJ in the first 10 months of 2021, according to PIERS. And nearly 70% of industrial space delivered in Q3 2021 had been pre-leased.

A desire to increase exposure to this strong performing CRE asset class is driving large institutional investors’ demands for industrial assets. According to a report, New Jersey’s industrial warehouse properties have been trading at an average $274 per square foot—higher than both Seattle (which averages $233 per square foot) and Los Angeles (averaging $218 per square foot). 

Although interest rates are beginning to rise, they’re still low enough that experts predict industrial assets will continue experiencing price increases through at least the first half of 2022. 

Construction is Booming

Net absorption hit a high of 250 million-square-feet at the end of 2021, and new construction of industrial warehouses to rent or buy is surging forward. Experts predict completions will jump by 29% in the coming months.

But how much does it cost to build an industrial warehouse? The short answer: it depends. There are various types of industrial warehouses, each with their own specific requirements:

  • Automated workflow with robotic and conveyor systems
  • Basic storage
  • Refrigerated with humidity control
  • Traditional bulk storage with forklifts

A range of materials—and construction types—also factors into the cost. For example, pre-engineered metal structures generally cost less. These structures work well for smaller warehouses. Tilt-up construction, which uses concreate wall panels often cast on site, house larger industrial warehouses and distribution centers.

Location plays a big factor into cost, too, which can range an average of between $80 (in Phoenix or Las Vegas) to $212.50 (in San Francisco and Honolulu) per square foot. New York averages about $157.50 per square foot. 

A Construction Cost Breakdown

The costs associated with warehouse construction depends on various factors but can be divided into four categories: hard, soft, financing, and long-term costs.

Hard costs include site and land development, paving and grading, landscaping, utilities, construction equipment rental, labor and materials, LEED certification, environmental systems, and safety systems. 

Soft costs include the architectural and engineering designs, permitting and other legal fees, taxes and insurance, and any movable equipment, technology, and fixtures the warehouse needs.

Financing costs may include short-term construction loans with partial releases—especially for industrial developments with multiple sites; bridge financing used to pay off construction loans; and permanent financing once the warehouse is built and leased.

Long-term costs include operating expenses like property management, utilities, maintenance, property taxes and insurance, CapEx, technology management, and environmental control features.

Sustained Demand Through 2022

In Q3 2021, New Jersey saw more than 14 million square feet of industrial space under construction—an increase of 6 million square feet from Q1. Vacancies dropped to 3.5% in Q2 and the average rent increased 5% from $9.67 to $10.17 per square foot—and 13% higher than the average $9.04 per square foot in Q4 2020. In South Jersey, rents rose 11% YOY to $5.86 per square foot.

Accelerating ecommerce activity and exponential growth within last-mile delivery services will continue to drive companies to find—or build—small to midsize warehouse and distribution facilities close to urban centers. Ecommerce sales have risen to more than $4 trillion since 2014—a 220% increase.

Companies focused are also pivoting to develop more resilient supply chain strategies, which includes rethinking a just-in-time approach to inventory management—and more space in which to store inventory, which will likely lead to additional competition for warehouse space.

 If you’re an investor or business looking for industrial space, you need a solid, knowledgeable team on your side. CREA United’s Industrial Real Estate Group is structured to help you succeed and reach your goals. This collaborative group of industry professionals offer a wealth of expertise in all aspects and services within the industrial real estate landscape.

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