Business Insight Center Fueled by e-commerce growth, industrial leasing continues to soar Fueled by e-commerce growth, industrial leasing continues to soar LIBRARY | 2/4/2021 SHARE THIS ARTICLE: Warehouse space was a priority before the coronavirus pandemic put a pall on brick and mortar retailing. With the shift to online shopping and record number of returns anticipated this holiday season, the demand for industrial square footage continues to be robust. E-commerce purchases, which typically have higher return rates of up to 30%, are partly behind the increase in demand for warehouse space, according to CBRE, which estimated that an additional 400 million square feet will be needed over the next five years simply to process returns. CBRE said that for every $1 billion in additional e-commerce sales, retailers require 1 million square feet of warehouse space. As strong consumer demand continues to fuel e-commerce, investors are looking to Europe, where penetration rates are still relatively low compared to the U.S. Strategically located distribution centers are becoming increasingly important for the success of retailers. Availability of such space is tight, with a relatively low vacancy rate of 4.7%. According to CBRE’s 2020 third quarter report, tight market conditions have pushed up prices, with triple-net asking rents averaging $8.09 per square foot in the third quarter, up 6.4% year-over-year, and the highest asking rent since the first quarter of 2019. Third quarter retail leasing was weak around the world, according to CBRE, with U.S. leasing revenue down by 36%. Global industrial leasing revenue rose 10%, driven by e-commerce. Strong industrial leasing limited the U.K.’s overall leasing revenue decline to 6% in the quarter. “We’ve had 41 quarters in a row of more net absorption than new supply,” said Jack Fraker, vice chairman and managing director of capital markets and institutional properties at CBRE. “Just as soon as someone builds a speculative warehouse, it’s already leased. “Online shopping was already growing dramatically,” Fraker said. “At the beginning of this year online shopping was 14 percent to 15 percent of all retail sales. It’s expected to be 39 percent by year 2030, and some experts think it can reach that mark a few years earlier.” “Logistics, warehousing and digital fulfillment have been the clear winners in 2020,” said Jason Tolliver, global head of logistics and industrial research and managing director of investor services at Cushman & Wakefield. “This segment has remained resilient throughout the pandemic, with the logistics segment on track to surpass the net occupancy growth of 2019. E-commerce will help generate more than 200 million square feet of demand for logistics space in 2021 with an additional 200 million square feet required in 2022.” The coronavirus pandemic interrupted supply chains with consumers hoarding grocery items. “Nobody wants that to happen again, so most retailers are building safety stock into their requirements,” Fraker said. “It’s an average of 5 percent safety stock or four or five weeks of additional inventory. That’s hundreds of millions of square feet of additional demand that wasn’t there.” Tolliver sees leasing activity focused on regional distribution centers and urban logistics. The former has allowed retailers to keep their inventory much closer to consumers and meet the short delivery times they expect. Return centers are an important and growing part of the e-commerce ecosystem. Proximity to major consumption centers helps retailers manage the transportation portion of reverse logistics and recirculates inventories faster. “Urban logistics are often crossdocking facilities situated close to the cities where bulk cargo is transferred to vans for the last link of delivery,” Tolliver said. “E-commerce has energized demand for this type of product, which enables rapid order fulfillment. Urban depots, an extension of established supply chains, are not only taking goods to retail centers and storefronts, but also directly to the doorstep of the consumer.” Retailers with big physical footprints are turning the back of their stores over to warehouse uses. Walmart ships from its stores and other retailers are reconfiguring part of their stores for use as distribution centers. “Some malls that were failing 10 years ago, were acquired and demolished and turned into warehouse parks,” Fraker said. “The typical mall is surrounded by good freeway and street access and is usually near a population center. There are some ideas to convert some [ailing] malls around the country to other uses.” While the strongest leasing demand for industrial is expected to be in Dallas, Chicago, Atlanta, Southern California, Houston, the Pennsylvania I-81/I-78 Corridor, Indianapolis, Toronto, and Phoenix, over two-thirds of North American industrial markets are forecast to grow by more than 1 million square feet in the next 24 months, Tolliver said. “We’re seeing very robust fundamental and tangible rental rate growth for industrial and logistics space,” Fraker said. “It’s attracting investors. The asset class is considered to be the post popular asset class in the world. Pension funds love this asset class.” This article was written by Sharon Edelson from Forbes and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com. CHECKING Business Checking Account Whether you are a small business or a large corporation, we can help you streamline your banking experience, avoid unnecessary fees and grow your business with a Valley Business Checking Account. Learn More Let’s talk 800-522-4100 Contact Valley Locate a Branch or an ATM PERSONAL Banking Financial Planning Lending Learning Center Account Log In BUSINESS Business Checking Commercial Lending Industry Expertise & Services Business Savings Treasury Solutions WHY VALLEY Careers Customer Service Investor Relations and Newsroom Ways to Bank With Us About Valley CONNECT WITH US DOWNLOAD OUR APP Copyright © 2021 Valley National Bank, All Rights Reserved. Member FDIC, Equal Housing Lender Privacy Security Terms of Use Accessibility FAQs