June 6, 2017

Pre-commitments for warehouse, DC space at highest level since 2000, report says

CBRE says 43 percent of space under construction already spoken for.

By Mark B. Solomon

Pre-Committed DC/Warehouse Space
City %
Denver 70.3%
Kansas City 54%
Chicago 51.3%
Indianapolis 50.6%
New Jersey 43.3%
Source: CBRE

Warehouse and distribution center space in the U.S. is being snapped up as fast as it can be completed. And, in a growing number of instances, even before that.

In a report to be released tomorrow, real estate services firm CBRE Group Inc. will report that 72 million square feet of warehouse space, or 43 percent of the total square footage under construction, has already been pre-committed. That is the highest level since 2000, according to CBRE data.

To put the current figures in historical perspective, since 2000 the quarterly average of pre-leased space has been 22 million square feet. The average quarterly percentage since 2000 has been 38 percent, CBRE said.

The numbers to be disclosed tomorrow are extraordinary because the percentage of pre-committed space is based on higher levels of construction activity than ever before, the Los Angeles-based company said.

The data is perhaps the strongest evidence yet of how starved users are for warehouse and DC space as e-commerce demand, combined with growth in other sectors like pharmaceuticals, strain capacity. It also indicates that despite accelerating industrial development—nearly 250 million square feet of space will be delivered this year, according to real estate services firm JLL Inc.—there is little indication of a meaningful alignment in supply and demand before sometime next year, at the earliest.

"Warehouse users are aggressively leasing space as soon as they have the opportunity, often even before the construction has been completed on the property," said David Egan, Americas head of industrial research for CBRE. Egan added that the capacity crunch could be somewhat eased as users occupy the new space and free up older facilities to be redeveloped.

Denver, whose overall real-estate market is scorching, leads the way with 70.3 percent of its under-construction space pre-committed, CBRE said. It is followed by Kansas City at 54 percent, Chicago at 51.3 percent; Indianapolis at 50.6 percent, and New Jersey at 43.3 percent.

Other real estate services firms echo CBRE's findings, albeit on a smaller scale and with different interpretations. New York-based Cushman & Wakefield said that half of all first-quarter net absorption—a measure of occupied square footage at the end of a period minus the occupied amount at the start, including vacated and newly constructed space—occurred in buildings constructed during the past two years. That is a sign properties don't sit idle for very long, according to Jason Tolliver, head of the company's industrial research for the Americas.

Tolliver said net absorption figures from 2014 to 2016 are the strongest recorded since C&W began tracking the data in the late 1980s.

Chicago-based JLL said pre-commitment levels for speculative and "build to suit" properties combined are at 42.9 percent, while the level for speculative development is at 26.9 percent. Build-to-suit projects are customized to meet a tenant's specific needs, while speculative properties are erected without a specific tenant in mind.

Build-to-suit properties are in demand by e-commerce companies, many of which require unique characteristics in their DC design and construction. However, in some cases they are an alternative for companies that want a speculative property to quickly gain or increase exposure in a specific market, only to discover that there is nothing available. JLL said first-quarter build-to-suit projects where construction had already begun rose 29 percent from the fourth quarter of 2016 alone.

In its 2017 "Industrial Outlook" report issued today, JLL said industrial tenants are experiencing the toughest market in the sector's history. Vacancy rates in northern New Jersey, San Francisco's mid-peninsula, Seattle, and California's Inland Empire east of Los Angeles are hovering around 4 percent. Vacancy rates in Los Angeles, northern California's East Bay, and Orange County are below 2 percent, JLL said. About 88 percent of the markets tracked by JLL remain favorable to landlords.

As a result, tenants in large warehouse spaces with leases of five years or more are likely to experience rental "sticker shock" when the leases come up for renewal, said Craig Meyer, president of JLL's industrial research group in the Americas. Meyer advised users to consider their options long before their lease renewal dates.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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