Warehouse spaces were tight, expensive, and hard to find for the past few years. The next couple of years don’t look much better either, according to several reports, which anticipate low vacancies and high rents through 2024.
Prior to 2020, many companies had run on the lean principle, keeping inventories low. But the supply shortages and stockouts prevalent during the pandemic have led to a shift in strategy, with companies opting to keep more inventory on hand. In 2021, the shipping and logistics industry had a historic — and challenging — year, with soaring ecommerce sales driving general merchandisers and retailers in search of additional warehouse space for storing inventory. Supply-chain issues remained, delaying shipments. Real estate developers struggled to meet demand. Local governments grappled with remote workforces trying to issue permits quickly
Another trend stemming from the global health crisis, which greatly accelerated ecommerce growth, was the realization that positioning inventory closer to the consumers made good business sense. Last-mile delivery schedules remain tight — and having access to that inventory in distribution centers located closer to the communities making purchases saves time and money.
But besides high demand and low availability, how does 2023 look for the warehouse industry? To find out, keep reading.
The Market Remains Strong
When it comes to industrial leasing, the market remains strong, with absorption outpacing development and rental rates climbing ever higher. Since Q2 2022, the ratio of space under construction to total inventory has grown 20 basis points, which some experts call “unprecedented.”
Here’s a snapshot of central and northern New Jersey’s numbers, according to one CRE company’s report. While average asking rents increased YOY — rising more than $3.00 per square foot in 2021, pricing acceleration slowed in 2022. Last year, asking rates grew about 3% to finish at an average of $16.65 per square foot. Rental rates in the ports remained the highest of all submarkets.
The same CRE company saw its market size at over 141 million square feet with 2.3 million square feet (or 1.7%) of available warehouse space. 2022 leasing activity was almost 3 million square feet. Total 2022 net absorption was 2,387,580 square feet, with just over 3 million square feet under construction and nearly 2 million square feet delivered.
Average asking rents hovered between $13.50 and $13.75 per square rate, remaining fairly stable throughout last year. When compared to Q4 2019, however, the rates have increased by more than 50%. Vacancy rates also increased in Q4 2022, up to 1.7% from 0.6% in Q4 of 2021.
Delivery … and Oversupply?
The pace of delivery is regulating as we move further away from 2020. With people back in the offices, it’s easier to conduct inspections. Construction continues, although material and labor shortages continue to delay new facility developments. One report found new construction has, in some cases, extended well beyond the typical nine-month timelines to two years before delivery.
Research indicated a robust construction pipeline with many projects being delivered in 2023 but also continued challenges keeping up with increasing demand — and an ongoing backlog of previous and current projects. The General Assembly recently passed the Third Party Inspection Bill (A573) by a 77-0 vote. This new law permits the use of private third-party building construction inspectors and may help to alleviate the backlog of construction waiting for inspection. The State Senate’s Senate Community and Urban Affairs Committee also introduced companion legislation (S3014).
2021 ended with available industrial space at 3.4%, an all-time low. Even with a record new supply, the national industrial vacancy remained below 4% last year.
But the record-low vacancy rates will stick around at least through mid-2023. What does that mean for 2024? It’s possible that as more warehouse space is delivered in Q3 and Q4 2023, the market will shift to an oversupply.
With nearly 4 million square feet currently under construction in the submarket, vacancy rates could increase by the end of 2023. But for now, rents remain strong — especially near ports and in communities where ecommerce giants rely on warehouses to facilitate last-mile delivery.
Diversification is In
If the pandemic clarified anything in the supply chain, it was the country’s vital need for geographic diversification. Imports normally slated to come through Long Beach and Los Angeles ports were rerouted to enter through eastern ports. While the California backlog has eased, it remains a problem in some of the southeastern and East Coast ports. And land for building and expansion is scarce in those markets.
But one solution includes urban infill sites. Building flexible, multitenant assets able to accommodate diverse users could prove a worthy investment.
Disruptive Trends Warehouses Will Address in 2023
Inflation pressures are easing, but supply chain teams will continue to focus on increasing resiliency and becoming more agile. They’ll hone their abilities to forecast predictions and manage disruptions while streamlining budgets and keeping costs low.
The labor shortage will continue — although it’s beginning to stabilize. But warehouse companies will implement end-to-end solutions designed to manage activities in real-time, increase efficiency, and boost productivity. Third-party logistics providers (3PL) will keep growing, as they focus on providing omnichannel fulfillment — and industry specialization — for diverse companies.
While everything felt in short supply in 2020 and 2021, last year felt like a year of excess. Companies are working to balance their inventory to address the mismatch of supply and demand. So while retailers might suffer a bit of short-term pain as they slough off excess inventory, they’ll also strategize how to maximize the warehouse space to maintain a better product balance to meet projected demand.
Other trends to watch this year?
- An increase in warehouse automation, whether via robotics strategies or other automated systems
- New warehouse design modeling and simulation software
- The increasing role of data security
- Predictive — and prescriptive — analytics
- Gamification to engage and motivate workforces
- A renewed focus on sustainability
2023 will likely bring a few surprises — and potential disruptions — to the warehouse industry, but all sources point to continued growth. Wall Street analysts say that self-storage, RV storage, and industrial warehouses are strong assets worth investing in this year.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.