Despite record demand for industrial space and virtually no vacancies in the tightest US markets, construction completions dropped by 27.8% in Q1 compared to Q4 due to materials and labor shortages, according to CBRE’s Q1 industrial report.
CBRE’s report, released this week, said the continued tightness in industrial supply—average vacancies were 3.1% in Q1—caused YOY net absorption to decline 10.4% to 93.8M SF, which is still higher than the 10-year average.
The average asking rent for industrial space increased by 3.7% quarter-over-quarter and 18.9% YOY to a record-high $8.94/SF, with no relief in sight, the report said.
Surging e-commerce growth and large occupiers pre-leasing more industrial space than they need in a record-tight market are expected to keep the upward pressure on rents as millions of square feet in new warehouse space is delivered in coming months.
According to CBRE, this trend is being exacerbated by companies now planning to stock more inventory to counter an anticipated continuation of the ongoing plague of supply chain disruptions.
“Demand from occupiers needing safety stock to counter supply chain disruptions should result in further rental rate appreciation and a record-low vacancy rate despite a large amount of new development this year,” CBRE said.
How much of that new development actually is delivered this year will largely be determined by how quickly supply chain backlogs can be resolved. This much is clear: when new warehouse space comes on line, most of it already will be spoken for.
About 62% of the 86.2M SF in industrial construction completed in Q1 was preleased, CBRE reported. Under-construction activity totaled 545.4M SF, of which 32.5% is pre-leased; Dallas-Ft. Worth, Inland Empire, Atlanta and Pennsylvania’s 1-78/81 corridor accounted for one-third of the total new construction, CBRE said.
Industrial developers dealing with construction delays also have an inflationary sword of Damocles hanging over their projects: the longer they push back delivery dates, the more it will cost them in rising prices for building materials and labor.
Amazon has emerged as a one-size-fits-all villain in the US industrial warehouse saga. The surge in online purchasing during the pandemic has been led as always by the e-commerce behemoth, with an estimated 60% of all online retail purchases in the US going through Amazon in 2021.
Now, as industrial developers who are racing to put up new warehouses scrounge for building materials and construction workers to finish the job, many say Amazon is standing in everyone’s way. The retail colossus is racing to grow its unmatched distribution network to nearly 460M SF by the end of this year, mainly via new construction in its pipeline.
According to Colliers, Amazon’s construction needs accounted for one-third of the steel made by a top US producer in 2021, pushing lead times to a 20-year high.